1

rChapter 1: The Problem, Rationale and Background

Introduction
Information technology has a noticeable effect in service and manufacturing
industries within the past few years, and the banking industry has not been an
exception. There is a need to divert ourselves from the traditional ways of banking
in order to keep up with the growing competition in the market as a result of
continuing technological advancements. As technology is now considered as the
main contributor for an organizations success, so the banks, be it domestic or
foreign, are now looking for innovative ways to provide their services with new
technologies through Internet banking. Today, a number of banks have now adopted
an Internet banking system to better cater their clienteles needs. But the question
is By implementing this modern method of service provision, can it have a
significant effect on the banks profitability? How will this modernization affect the
financial growth of certain banks? These questions call for a local study on the
impact of Internet banking on a banks financial performance.
Advances in technology, especially in information and communication, led to
the rapid diffusion of Internet in the country. Internet technology holds the potential
to fundamentally change banks and the banking industry. An extreme view
speculates that the Internet will destroy old models of how bank services are
developed and delivered (DeYoung, 2001). The Internet has been a key factor in
driving globalization in the last decade. It paved way for several business
opportunities and advancements such as the Internet banking.

While this is a

global phenomenon, creating a truly global marketplace, penetration of Internet

banking into less developed countries lags behind that of the developed Western
countries. It is because of some factors such as education, infrastructure, financial
resources, and others.
Internet banking is a type of innovative technology that provides banking
services in a fast and more efficient way. Banking has always been a highly
information-intensive activity that relies heavily on information technology (IT) to
acquire, process, and deliver the information to all relevant users (Baraghani, 2007).
In todays time, almost everything is connected to the Internet and almost everyone

is online. This is a great opportunity for banks to take advantage of this

advancement by providing Internet banking services that results to better
relationship between the banks and its clients.
Even though several banks already started offering Internet banking in the
Philippines, there are still many issues that must be considered before incorporating
it with the traditional banking. Insufficiency of available resources is one of the
factors why its application must first be thoroughly examined. Implementing a
system for Internet banking needs a huge amount of investment financially from the
bank owners. In addition, banks still cant assume that their clients already have an
access to Internet and the devices needed to use the system. Moreover, the clients
need to have a sufficient knowledge on the system in order to take advantage of
the features and services offered by Internet banking.
But due to its easy access feature, bank clients perceived it to be riskier than
traditional banking (Demirdogen, et al 2010). Fraudsters and hackers with profound
knowledge of information technology have appeared and started to penetrate and
abuse different banking systems in the Philippines. According to Hertzum et al.
(2004), e-banking must balance the security and ease of use. But due to the ease of
use of every e-banking system, sometimes it indicates that the systems have
serious weakness and this suggests that security are among their causes and that
these weaknesses may result to a sudden decrease in security.
In lieu of the aforementioned issues, this study seeks to examine the impact
of Internet banking on the profitability of selected Philippine banks, namely BDO
Unibank Inc. (BDO) and Bank of the Philippine Islands (BPI). It also aims to assess
the effects of the transition from the traditional banking system to the Internet
banking system on the banks. In addition, the researchers would like to identify the
impediments in the provision of banks of their services through the Internet.
The results of this study will be beneficial to the Philippine banking industry,
bank management, bank clienteles and customers. Furthermore, the study will be
an addition to the existing literature regarding Internet banking that could aid future
researchers.

Statement of the Problem

This research intends to analyze the impact of Internet banking on the
profitability of BDO Unibank Inc. (BDO) and Bank of the Philippine Islands (BPI) in
the Philippines.
In the light of this research problem, this study aims to answer the following
research questions:
1. What are the advantages and disadvantages of the transition from the
traditional banking system to the Internet banking system?
2. What are the impediments in the provision of banks of their services through
the Internet?
3. What are the mechanisms necessary for a successful implementation of an
Internet banking system?
4. Does Internet banking affect the profitability of BDO and BPI in terms of ROA,
ROE, operating expenses and net income?
Theoretical Framework
Internet banking is sometimes referred to as transactional Internet banking.
This involves the provision of facilities such as accessing personal account
information, funds transfer and provision of financial services through the use of the
Internet. The Internet also helps banks to enter other financial markets without
requiring their physical presence in those markets. The widespread availability of
Internet banking is expected to affect the financial services offered by banks, the
manner in which banks deliver these services to customers and the resulting
financial performances of these institutions.
At present, there is a vast collection of published studies and literatures
regarding Internet banking from different countries. Some of these are the works of
Podder (2005), Vyas (2008), and Dinh, Le & Le (2015). Each study presents different
views and opinions about the causes for an Internet banking adoption - its nature,
types, functions and limitations, and ultimately, its impact on profitability. For this

paper, the researchers used Van Dinh, Uyen Le and Phuong Les theory as its
theoretical framework in analyzing the impact of Internet banking n the profitability
of selected banks in the Philippines, namely BDO and BPI. This is applicable to a
study that is to be conducted in the Philippine setting since both nations are still
considered to be developing countries. Furthermore, the period taken into account
in the study will be of great guide for the researchers since it deals with a period of
more than a year, which could help produce better results for the local research.
According to their study, Internet banking has a positive impact on
commercial banks non-interest income and thereby increasing their profitability.
However, in developing countries, this effect takes a time lag of 3 years before it
becomes observable, and it has a relatively small degree in comparison with that of
developed countries. However, as opposed to the common notion that adoption of
Internet banking reduces operating costs, the results of their study suggest
otherwise. This low impact on profitability implies that Internet banking serves more
as a complement rather than as a complete substitute for traditional banking.
The study was conducted in Vietnam for five years, starting from 2009 - the
year when their adoption of Internet banking started - until 2014. This involved a
sample of 20 commercial banks, embodying almost half of the total number of
banks in the country. Random effect model (REM) and fixed effect model (FEM) were
used to measure the impact of Internet banking to operational efficiency. The study
provided a thorough analysis of the data gathered.
This theory, together with the other supporting literatures, will be further
discussed in Chapter 2: Review of Related Literature.
Conceptual Framework
Internet banking is one of the branches of electronic banking (e-banking). By
integrating e-banking in different bank operations, it will enable bank customers to
access personal accounts and obtain general information about bank services
remotely through the Internet. Aside from the usual modes of e-banking like ATMs,
telephone and mobile banking, the adoption of Internet banking adds another
delivery channel and forms the multichannel model seen widely in banking industry

nowadays. The use of Internet banking is a great opportunity for customers and
banks alike as it has a huge potential as a convenient and efficient delivery system
which has not been provided before by banks. And by continuing to improve and
strengthen this service, Internet banking may give way to a new business model,
totally different from the traditional one and may have a significant impact on the
banks profitability.
Net income

Adoption of
Internet Banking

Operating costs
Return on Assets

Financial Performance
of Banks

Return on Equity

Figure 1.1: The Conceptual Framework on the Analysis of the Impact of

Internet Banking on the Profitability of BDO and BPI
Figure 1.1 shows the diagram of the conceptual framework of this research.
Similar to the model used by Dinh, Le & Le (2015), this study recognizes that a
transition from the traditional banking system to a modern banking system such as
the adoption of Internet banking affects several factors that could ultimately
influence the financial performance of banks. For this study, the researchers would
examine if the adoption of a digital channel such as Internet banking, reduces
banks operating expenses, increases their net income and consequently, improves
the banks profitability.
In the study of Mawutor (2014), it was stressed that the modern banking
system does have an influence on the profitability of commercial banks. Results
show that in the year the innovation was introduced, there was a significant
increase in the net profit margin of the bank. But a year after the introduction, it
slightly fell and increased once again the following year.
The influence of the adoption of Internet banking on banks operating costs is
another variable that affects the profitability of banks. On a study done by

Hernando and Nieto (2007) on Spanish banks, it was noted that although the effects
of such an innovation takes time to appear, the increase in the banks profitability
was attributable to the gradual decreases over time in their overhead expenses,
particularly in staff costs, IT expenses and marketing expenditures. With these cost
reductions, efficiency gain resulted for the banks.
Overall, the financial performance of banks can be affected by several factors
brought about by the emergence of Internet banking. But for this study, factors
namely the (1) changes in banks net income (2) changes in operating costs (3)
changes in Return on Assets and (4) changes in Return on Equity will be the
considered variables that will ultimately affect bank financial performance.
Moreover, profitability ratios such as return on assets (ROA) and return on equity
(ROE) were used as independent variables. Many studies throughout the rest of this
paper will discuss how Internet banking and the aforementioned factors influence
bank profitability.
Significance of the Study
The primary purpose of this study is to analyze the impact of Internet banking
on the profitability of BDO and BPI in the Philippines.
This study will truly be significant because it will affect the following
beneficiaries:
Philippine Banking Industry
With the outcome of this research, the local banking industry would be given
an international perspective on how Internet banking is conducted. Furthermore,
this study would give relevant and recent trends on how to keep up with the global
standards of Internet banking. With this, there would be an extensive promotion of
banks and other financial institutions. More importantly, this study would provide
insights on how the Philippine banking industry can efficiently and effectively adapt
to the changing global financial markets.
Bank Management

The findings of the study will help support administrative decision-making

activities regarding investments in providing new ways of reaching to customers
and innovative methods of catering to their banking needs. This would permit the
banks to concentrate their resources and improve necessary strategies to motivate
bank clients to switch to Internet banking. This research will also provide them
useful information in assessing the implication of such an innovation which would
eventually lead to a significant change in the banks financial growth and
performance.
Bank Clients
This study would give awareness to bank clients and would highlight their
concrete role and importance to the blooming and continuing success of banks in
their implementation of Internet banking. This paper would also emphasize the
symbiotic relationship existing between clienteles and banks. Customers would be
educated and informed on how to fully grasp the services of banks employing
Internet banking while banking institutions would enjoy financial growth from their
continued patronage of Internet banking services.
Future Researchers
This research will provide a general analysis on the impact of Internet
banking on the profitability of the selected banks in the Philippines. This may serve
as a starting point or as an additional reference for future researchers subsequent
studies regarding Internet banking in the country. Other researchers may use this
study when they begin tackling other affected aspects of the banking industry or
when they pioneer the research on a new emerging practice of banking in the form
of mobile banking (m-banking).
Scope and Limitation
The study focuses mainly on the analysis of the impact of Internet banking on
the profitability of selected banks in the Philippines, particularly BDO and BPI. The
two aforementioned banks are considered in the study given that they are the two
largest banks in the Philippines, in terms of core or tier one capital adequacy ratio
(CAR), assets, solid performance and robust earnings(Dumlao-Abadilla, 2015), and

the two banks with an extensive use and application of Internet banking. The
researchers access for information regarding the banks financial performance sets
another limit for this study.
The research will not anymore discuss the non-monetary effects of Internet
banking such as enhanced customers trust and loyalty to the banks, improved
customers satisfaction and retention, and other matters from the customers
perspective. Furthermore, the study would no longer take into account the intensity
in the use of Internet banking due to the difficulty of quantifying such factor.
Moreover, the researchers are only looking into the financial effects of such an
adoption of modern banking system.
There are studies suggesting that other branches of e-banking such as ATMs,
telephone banking and mobile banking (m-banking) could influence the financial
performance of banks. However, these branches will no longer be discussed in this
paper since the focus of the study is on the impact of Internet banking on the
profitability of BDO and BPI.
Hypothesis
The study will be guided by the following null hypotheses:
H01: Internet banking does not have a positive impact on the profitability of BDO
and BPI.
H02: Internet banking does not reduce the operating expenses of BDO and BPI.
H03: Internet banking does not increase the net income of BDO and BPI.
Assumptions
The following are the assumptions in conducting the study:
1. The global and local economic conditions that occurred during the time
period considered in the study have no relevant impact on bank performance.
2. The use of Internet banking in the Philippines is widespread and accessible to
relevant parties, with BDO and BPI offering the same kind of online services.

3. Banks personnel, as well as bank clients, are well-informed on the use of

Internet banking and acquainted with the services offered by banks through
the Internet
4. Internet banking is one of the significant factors in the increase of clientele
since its implementation.
5. Existing clients are willing to use Internet banking as a mode of doing their
bank transactions.
6. Internet banking is a continuing service ever since its inception.
Definition of Terms
1. Profitability performance of the banks which is affected by changes in ROA,
ROE, operating expense and net income.
2. Internet banking banking transactions conducted through the use of bank
online websites with the use of devices such as personal computers and
laptops.
3. Traditional banking banking transactions conducted through physical bank
branches
4. Impediments matters that hinder banks from successfully providing bank
clients with services through the Internet.
5. Mechanisms factors that make the Internet banking function properly.
6. Positive impact effect of Internet banking in terms of increase in the banks
profitability

10

Chapter 2: Review of Related Literature

This paper is concerned with a general analysis of the impact of Internet
banking on the profitability of selected banks in the Philippines. The sources of
information that have been gathered come from different forms of information such
as academic journals, periodicals, articles and newspapers. These papers will help
identify if there is a relationship between the implementation of an Internet banking
system and banks financial growth and profitability, as observed in Middle Eastern
countries like Iran, Turkey, and Ghana and in Euro-Asian regions like Greece,
Vietnam, and India, where some studies are conducted. Also, the researchers aim to
know the effects of such a transition to a new method of providing bank services
and its corresponding advantages and disadvantages. The paper is also concerned
with the necessary factors that could lead to a successful adoption of an Internet
banking system. It will also tackle the common challenges and problems faced by
banks when they conduct their transactions online. For this paper, the researchers
will describe the different types, functions, advantages and limitations of
implementing the Internet banking system. Further discussed is the emergence of
Internet banking in different countries, the factors and challenges in its application
and its impact on the financial performance of the banks. This paper is only limited
to the profitability of Internet banking and not on other aspects of electronic
banking. Also, this paper will only discuss topics about how Internet banking affects
the bank itself and not how it influences specific customers and clientele needs and
satisfaction.
Related Literature
Emergence of Technology in Banking
In the study of Podder (2005), he cited that the offering of financial services
over the Internet by banks and financial institutions continues to spread, although
reports on Internet banking show that the adoption and usage of such services by
consumers is low. Furthermore, relatively little empirical research has been carried
out to examine factors influencing users adoption or use of Internet banking
services. Hence, he concluded that there is a need to identify relevant factors that
influence bank customers intentions to use Internet banking. He proposes two

11

theories regarding recognition of new technology. First is Daviss (1989) Technology

Acceptance Model (TAM) where different factors are considered when accepting new
technology such as perceived usefulness and perceived ease of use. The second
theory used is the reduced version of Moore and Benbasats (1991) Perceived
Characteristics of Innovation (PCI) Model, without the image and voluntariness
constructs. This theory assumes that a well-accepted technology in one society may
not necessarily be well-accepted by members in another society. A questionnaire
was used in conducting a postal survey of 1000 individuals in Auckland, New
Zealand. The results reveal that perceived usefulness, perceived ease of use, selfefficacy, relative advantage, compatibility, and result demonstrability have a
significant association with the intention to use Internet banking, while risk, visibility
and trialability are not significant. In the TAM model, perceived usefulness and selfefficacy are significant variables, while compatibility is the only significant variable
for the PCI model. Moreover, results indicate that users perceptions of various
aspects of Internet banking are more positive than non-users perceptions, except
for risk. The results of this study indicate that both TAM and PCI have low
capabilities in explaining the variances in users intention to adopt or use Internet
banking services. Therefore, further studies are recommended to examine the
performance of these models in Internet banking studies and also to improve the
prediction power of these models by incorporating additional constructs.
Research also shows that innovation is a driving force for a specific industry.
This is discussed by Mahajan and Peterson (2010) when they proposed a theory
called Innovation Diffusion Theory where they attempt to explain how innovations,
or in this case Internet banking, is adopted and becomes successful. Not all
innovations lead to a successful adaptation and might take a long time to adapt
because of factors such as time constraints and hindrances. The theory describes
five critical attributes that greatly contribute to faster adaptation. These are:
compatibility, complexity, capability for trial, observability and relative advantage.
How a company perceives these five factors is important. If top tier banks observe
this kind of practice with Internet and mobile banking, it will lead to faster
adaptation.
Advantages and Disadvantages of Internet Banking

12

Internet banking is now a critical factor for a banks performance and

changes the banking industry especially the bank-to-client relationship. Internet
banking is now offered by almost every bank in different countries around the world,
which is why knowing every aspect of it is a must for the clients and especially for
the banks. The research paper discussed about the functions, types, advantages
and limitations of Internet banking. According to this research of Vyas (2008),
Internet banking has the primary function of providing account information inquiry,
and in addition, it also offers fund transfer for client-to-client and business-tocustomer transactions. Internet banking also allows the clients to manage their
account by just logging-in on the Internet. The researcher also enumerated some
other types of e-banking such as ATM and mobile banking, which are very common
nowadays. Lastly, the study discussed the advantages and disadvantages of
Internet banking. Based from the research paper, the most important advantage of
Internet banking is its time efficiency for the banks and especially for the
customers. With the use of the Internet, fund transfers and requests, bill payments,
shopping, investing and initial public offerings are just a click away from the
customers.
But due to its easy access feature, Internet banking is also a good opening for
the fraudsters and hackers for they can manipulate the Internet bankings security
with their knowledge of information technology.
Impact of Internet Banking on Performance and Risk
Considering the present century as The Age of Communication, Aghdam
and Sadrabadi (2015) believe that organizations and service institutions at present
are exerting their best efforts to provide their customers, even in the most remote
parts of the world, greater and easier access to the services they offer. Banking, as
a profitable industry, has not been an exception. The extensive and growing
development of information technology and the expansion of the scope of its
application to the financial industries have changed the contemporary banking
methods. The utilization of new technologies has enabled financial institutions to
provide their customers with higher quality services with less effort and trouble. In
line with this, the researchers aim to focus on the role of modern banking services in
the form of Internet banking, in improving the profitability of eight banks in Iran.

13

In measuring the impact of Internet banking on bank performance, the

researchers hypothesized that a banks Return on Asset (ROA) and Return on Equity
(ROE), which are measures of profitability, are affected by independent factors such
as: (1) Growth Rate of Bank Deposits, (2) Bank Risk, (3) Market Concentration Index,
(4) Number of Online Branches, and (5) Entry Year of Internet Banking.
After testing the hypothesis and investigating the established model, it was
discovered that the variable of Market Concentration had the greatest influence on
the profitability of banks. Results showed that there is a strong and positive
relationship

between

market

concentration

index

and

bank

profitability.

Furthermore, the Number of Online Branches and ROA had a positive relationship
yet no such relationship exists for ROE. In this study, Bank Risk and Deposit Growth
also shared no meaningful correlation with bank profitability (ROA and ROE). On
another note, it was observed that there was a decline in the financial performance
of the banks in their year of application of Internet banking. This was attributed to
the requirements of an e-banking system such as modern infrastructures and
equipment, experts in the field, advertisement and encouragement to the use of the
new services. A high installation cost of Internet banking has indeed reduced bank
profitability
The Transaction Cost Innovation Theory proposed by Niehans (2006) suggests
that a dominant factor in prevailing financial prosperity is the reduction of
transaction costs, which can lead to financial innovation. By reducing transaction
costs, it can improve the services of a company. With the information technology
the world has today, companies can use it to reduce transaction costs and time as
well. This will be good for banks who will offer bank services with the use of mobile
and Internet banking because it will provide an off-site access for customers. With
the reduction of operation costs through Internet banking, it may influence the
increase in net income of the banks.
Similar to this study, Van Dinh, Uyen Le and Phuong Le (2015) sought to
evaluate the impact of Internet banking to bank performance in Vietnam. According
to them, Internet banking is one of the features that can be expected from a
commercial bank. Its implementation allows the customers to conduct bank
transactions with ease, control and speed. Consequently, this boosts customer

14

satisfaction and user loyalty - the ultimate goal of every bank. Therefore, this gave
them a reason to believe that Internet banking is a necessary service to provide;
otherwise a bank may lose their market share or experience other bad effects to
their brand.
Internet banking is a great opportunity for financial service providers. But in
spite of that, only a few banks adopted it in Vietnam though it was available since
2004. Data revealed that this was due to the low level of information and
communication technology infrastructure. In addition, total number of Internet users
is somewhat lower than the average of Asia-Pacific. With this slow development, risk
of not meeting customer needs and expectations arises. Lack of available research
on this area prompted the researchers to conduct a study.
Their study involved 20 commercial banks, representing about half of the
total number of commercial banks in Vietnam, to examine the impact of the
adoption of the Internet banking on profit, operating cost, and performance from
2009-2014. In estimating the relationship between the independent (Internet
indicators) and dependent factors (performance), random effect model (REM) and
fixed effect model (FEM) were used. The results indicated that the adoption of
Internet banking has an impact on income (profitability); however, its effect is
gradual and takes a time lag of three years.
Related Studies
Emergence of Technology in Banking
According to the study of Suominen (2001), the Nordic countries, especially
Finland and Sweden, were the world leaders in electronic banking way back in 2001
when it was just starting to bloom. Because of the Nordic countries rapid transition
to Internet banking, they became a world pioneer that resulted to a major
restructuring of the banking industry in the whole world. In this paper, the
researcher discussed why e-banking has become more popular in Nordic countries,
especially in Finland and Sweden, than elsewhere and its effects on the profitability
of the banks.

15

In Finland, e-banking started because of the need for non-cash payment and
transfers due to the checks lack of account information of the receiving party.
Online offerings in Finland include equity securities and bonds, initial public
offerings, mutual funds, life insurance, loans, electronic billing and electronic salary
statements. From the data collected in banks offering e-banking in Finland, there are
significant cost savings with electronic billing as the seller can send his bill
electronically, thus avoiding mailing costs, and the customer need not re-enter the
billing information to his computer.
While in Sweden, the development of Internet banking for private customers
has been more difficult than in Finland because the Swedish banks did not develop
their PC banking solutions ahead of time. The effects of e-banking in Finland
resulted to a steady decline on cost-income ratio. Despite of the customers
continuously switching to Internet banking for which they are paying lower fees,
partly due to increased activity of the switched customers, the banks income has
steadily risen, between 1997 and 2000. While in Sweden, e-banking did not have an
immediate positive result, for the cost-income ratio has not declined in a similar
way but actually rose between 1997 and 1999, falling only during the year 2000.
This is partly because of the high development costs of the Internet banking
systems and investments in IT capacity in Sweden during the years 1997 - 1999.
From the data collected and analyzed, the researcher concluded that e-banking
resulted to a good profitability for Nordic banks of the past years, which has also
affected the good performance of these banks in the stock market.
Adoption of Internet banking in the Philippines
According to Lim (2013), e-banking had already emerged and developed
significantly in the Philippines from ATM and phone banking to Internet banking. In
this paper, the researcher aims to achieve the different factors or reasons on the
adoption of Internet banking in Manila. The researcher used factor analysis and
multiple regression analysis to study the relationship between the adoption of
Internet banking and its perceived usefulness and ease of use. The data was
gathered from 200 Internet banking users and non-users in Manila. The sample
chosen represented the profile of the respondents based on gender, age, civil status
and education. Based on the analysis of the conducted survey, there is a significant

16

positive relationship between the perceived usefulness and ease of use to Internet
banking. The researcher also recommended that understanding of the determinants
affecting the intention to use Internet banking is important for the banks to reach
competitive advantage.
Impediments of Adopting Internet Banking
Based from the study of Demirdogen, Yaprakli, Yilmaz, and Husain (2010)
conducted in Turkey, due to the easier access of Internet even in developing
countries such as Turkey, several banking customers uses Internet banking actively
which rose to about 18% of all bank clients in Turkey alone. But because of its easy
access feature, clients perceived it to have higher risks compare to traditional
banking. According to this paper, the perceived risks have six differen types: time
risk, finacial risk, performance risk, psychological risk, safety risk & confidentiality
risk. This paper aims to understand whether the perceived risks are valid and the
levels of perceived risks by the Internet banking users. According to the data
gathered from the conducted survey on 350 academic staffs, the researchers
concluded that there is a significant relationship between the perceived risks and
the clients level of income. The data analysis also made the researchers to
conclude that the perceived risks such as in terms of financial, psychological and
safety risks among customer not using IB was more pronounced than those using
IB. Clients not preferring to use Internet banking thought that they would be
swindled by using this service, and so, were particularly careful about high risk
expectation during money transfers from and between accounts.
Mechanisms in Adopting Internet Banking
In the study of Baraghani (2007), she discussed the different factors that
influence the adoption of Internet banking. With the rapid diffusion of the Internet,
banking in cyberspace is fast becoming an alternative channel to provide banking
services and products. The framework she used was supported by the Technology
Acceptance Model (TAM) (Davis, 1989), Theory of Planned Behavior (TPB) (Ajzen,
1991) and Trust. The framework includes Attitude, subjective norm, Perceived
behavioral control, Perceived usefulness, Perceived ease of use, Trust and intention
constructs. Survey was conducted to gather the data and Partial Least Square was

17

used to examine the entire pattern of inter-correlations among the thirteen

proposed constructs and to test related propositions empirically. The study shows
that recognizing both technological and trust-based issues are important in
increasing customers behavioral intention to use Internet banking. The implication
of these findings and conclusions are that, banks need to play a leading role in
influencing the perception, and there by the attitude and behavior of current and
potential Internet banking users. Two strategies were recommended by the
researcher; push strategy and pull strategy. Push strategy is increasing the
awareness of the public of the use of Internet banking, while pull strategy is the
effective co-operation among banks and its users. The value of Internet banking is
increased by linking one activity with other both within banks and with outside
suppliers, channels and customers (Porter, 2001).
Impact of Internet Banking on Performance and Risk
With the rapid development of information technology and introduction of
Internet-banking services, banking processes has become more efficient and faster.
This was supported by Okiro and Ndungu (2013), stating that, based on their study,
the adoption of Internet banking has enhanced performance of the banking industry
in Kenya. Their study used qualitative data, acquired through survey of 30 financial
institutions, which were classified according to microfinance institutions, savings
and credit cooperative organizations (SACCOs), and commercial banks. The
gathered data were analyzed using statistical data analysis to identify the customer
turnout level after the introduction of Internet banking. The results showed that
majority of the respondents had a high customer turnout level, implying that there
is potential for growth of Internet banking in the succeeding years. Also, majority of
the responses indicated that Internet banking did have an impact on performance
due to increased efficiency, effectiveness and productivity, and that it can lead to
higher return. The study also aimed to establish the extent of mobile and Internet
banking usage in Kenya and the results revealed that among the financial
institutions surveyed, commercial banks had the highest usage, followed by SACCOs
whereas none from the microfinance institutions have adopted Internet banking.
Furthermore, the study identified that among the services made available through

18

Internet banking, the most commonly used was online balance inquiry while the
least availed service was online bill payment.
According to Malhotra and Singh (2009), the widespread availability of
Internet banking is expected to affect the mixture of financial services produced by
banks, the manner in which banks produce these services and the resulting financial
performances of these banks. Whether or not this extreme view proves correct and
whether banks take advantage of this new technology will depend on their
assessment of the profitability of such a delivery system for their services. The
study seeks to examine the impact of Internet banking on banks performance and
risk. The method used for data gathering was to survey 85 scheduled commercial
banks websites, during the period of June 2007, the results show that more than
half of the commercial banks are providing transactional Internet banking services.
The data gathered were examined by using univariate analysis and multiple
regression. The univariate analysis indicates that Internet banks are larger banks
and have better operating efficiency ratios and profitability as compared to nonInternet banks. Internet banks rely more heavily on core deposits for funding than
non-Internet banks do. However, the multiple regression results reveal that the
profitability and offering of Internet banking does not have any significant
association, on the other hand, Internet banking has a significant and negative
association with risk profile of the banks.
The

researchers

concluded

that

the

evidence

reveals

no

significant

association between adoption of Internet banking by banks and their performance.

However, Internet banking has a negative and significant impact on profitability of
private sector banks particularly new private sector banks.
Comparative to the study of Malhotra and Singh, according to the study of
Stoica, Mehdian, and Sargu (2015), Internet banking, as a financial innovation and
means of intermediation, has grown considerably during the last decade. The
primary reason for the growth in Internet banking services is that they reduce costs
and enhance profits for banks, while enriching customer convenience through the
ease and rapidity with which transactions are executed. Internet banking helps
banks reduce operating costs while diminishing the need for a wide territorial
network. The aim of their research is to analyze the way in which the financial

19

innovation represented by Internet banking services can contribute to the

enhancement of the overall efficiency of Romanian banks. Data were gathered by
collecting the inputs and outputs from the annual reports of the banks in their
sample, Bureau Van DijkBankscope and Alexa.com databases for the year 2010. The
methodology used in this paper was data envelopment analysis (DEA), introduced
by Charnes et al. (1978). This methodology involves mathematical linear
programming models to construct optimal Pareto efficient frontier relative to which
the efficiency of each bank is gauged (see Cooper et al., 2000; Martins-Filho and
Yao, 2008). Also, principal components analysis (PCA) was used in order to extract
relevant data and eliminate redundant information. PCA is a multidimensional
reduction process that facilitates the analysis and simplification of data (Fukunaga,
1990; Dunteman, 1999).
The results suggest that there are two business strategies practiced in the
Romanian banking sector: cost oriented and Internet banking oriented. In
addition, the researchers find that only a few of the Romanian are able to efficiently
use Internet banking services in order to enhance their overall performances. Most
of the other banks in the sample prefer a mixed approach between Internet banking
services and cost reduction strategies.
Different from the results concluded by the above studies, the significant
changes brought about the paradigm shift to the technological age brought about
noteworthy changes in the banking industry. Uppal (2010) stresses the fact that the
IT revolution entirely changed the way banking is done and this change brought
about increased performance and profitability in private sector banks and foreign
banks across the Indian landscape. By analyzing the five major banking groupsnationalized banks, SBI and its associates, old private sector banks, new private
sector banks, and foreign banks- and separating them in the pre e-banking period
and post e-banking period based on profitability, it is observed that both in the
industry level and the group level, profitability increased in the post e-banking
period. Even though there are issues involving its implementation, the benefits of
digital banking will outweigh its costs and will lead to a substantially better
performance.

20

Moreover, in the study conducted by Dehghan, Ghafoorifard, Shamsi, and

SeyedHeydari (2015) on banking profitability, they observed a recent growth of
information technology and increasing competition among banks and this has
considerably affected attracting customers. These services, as different branches of
electronic banking, are consisting of Internet banking, mobile banking, telephone
banking, point of sale (POS), ATM, and electronic money. Their research examined
each aspect of electronic banking and its relationship to profitability. By examining
each e-resource cause and effect relationship with profit making, they found out
that both ATMs and Internet banking significantly and directly affects profitability
whilst the others like mobile banking, telephone banking, POS, and electronic
money does not significantly affect profitability.
Identically, according to Mylonakis (2010), information technology is vital for
the continuing survival of an industrys competitiveness and survival. There is a
current trend in banking and financial institutions to shift to online and electronic
services in order to remain in the business. The structure and behavior of todays
banks have been reformed at a global level because of IT. By conducting an analysis
on the different banks of different types in Greece, it is observed that banks who
apply IT prevail more in terms of profitability in comparison to banks who still apply
traditional banking services. Thus, it is suggested that in order to be in the financial
business for a long time, an innovative change in traditional dynamics is required
and these changes if done right can lead to increased market share and profitability.
Not to mention the research conducted by Gautam (2012) on the Indian
banking industries, he emphasized that because of innovative banking technologies,
the Indian retail banking industry have swiftly risen through the ranks and became
stable. Through the use the Internet as a differentiating and strategic medium, it
can offer high valued financial services and at the same time improved quality
without any physical boundaries. To gather information a descriptive and
exploratory interview with different bank managers in India with open questions like
the Internet services they offer, how it reduced or alleviated costs or profit and
whether the introduction of this kind of system helped in the profitability of the
bank. Results show that Internet banking revolutionized the business in good way
with better services and can be a factor in attracting customers which can lead to

21

increase in profit. All those who are surveyed believe that electronic and Internet
banking is a core strategy for the bank to be competitive and enabled the banks to
meet their costs, have a profit margin and increased retention and attraction of
clientele.
Likewise, based on the study conducted by Aduda and Kingoo (2012),
Information technology has truly become the focus of a global change curve of
electronic banking system in Kenya today. This paper investigated the relationship
between e-banking and performance of Kenya banking system today. The
researcher primary objective is to know whether there is relationship between the
dependent variable i.e., performance measured by return on assets and the
independent variables: investments in e-banking, number of ATMS and number of
debits cards issued to customers as proxy for e-banking. This research adopted both
descriptive and explanatory research design. First, the study described the trend of
bank performance in banking sector and second, the explanatory approach was
used investigate existing relationship between bank performance and e-banking,
and carefully tests causal research objective of the study. Pearson correlation is the
statistical method used to evaluate the relationship between the variables. The
correlation matrix is an important indicator that tests the linear relationship,
between the independent and dependent variables. From the data analysis, the
researchers found out that there is a positive relationship between e-banking and
the banks performance. In addition, E-banking has produced changes in the
structure of bank income because even though it increased competition, banks
have diversified their sources of income and rely increasingly on income from fees
services rather than interest rate spreads. These fees came from the charges on
services such as include typical banking activities like payment transactions, safe
custody and account administration.
While according to the research conducted by Hernando and Nieto (2007) to
the banks of Spain, transactional website began in the late 1990s. By the start of
the new millennium in 2002, more than half of the commercial banks have
incorporated the Internet as a new distribution channel for money transfers,
deposits, and other financial transactions as a result of the booming technology.
This innovation has changed the traditional banking business model by making it

22

possible for banks to break their customary value creation so as to allow flexible
production and distribution of financial services.
In order to identify and estimate the impact of the implementation of a
transactional website on a banks financial performance, the researchers used
information from the database of Banco de Espana and from the individual banks
websites. 72 commercial banks were considered in the study over the period of
1994 to 2002.
Results show that the effects of such innovation take time to appear. The
impact of a transition from the traditional to an Internet delivery channel is not
immediate but gradual. But despite this, the relationship between the adoption and
the banks financial performance was identified to be positive. This profitability can
be attributed to a gradual reduction in overhead expenses, particularly in staff
costs, IT expenses, and marketing expenditures. Efficiency gains resulted as a
consequence of these cost reductions. Moreover, the researchers conclude that
rather than seeing Internet banking as a substitute for physical branches of banks,
this innovation should be viewed and used as a complement to traditional means of
providing financial services.
Nonetheless, Hernando and Nieto both acknowledge the scarcity of available
empirical studies regarding the impact of the Internet on the financial performance
banks worldwide and urge fellow finance economists to expend some effort toiling
in this untilled field (Frame & White, 2004).
Lastly, the research of Mawutor (2014) similarly attempted to evaluate the
impact of e-banking on the profitability of a particular bank in Ghana. In his study,
he observed that bankers now see a kind of revolution in the banking industry,
relatively because the world has now taken a significant leap in the use of
technologies in their operations for the past several years. The Agricultural
Development Bank (ADB), the bank he focused on in his research, has recognized
the need to incorporate the use of e-banking in to its activities.
To determine how the adoption of e-banking has affected the profitability of
ADB, the researcher needed to calculate the Return on Assets (ROA), Return on

23

Equity (ROE) and Net Profit Margin of the bank, from 2008 to 2010 when ADB had
not yet introduced electronic banking, and from 2011 when it was introduced to
2013.
After gathering and analyzing information from the financial statements of
the bank from the years 2008 to 2013, it was determined that e-banking did had an
impact on the profitability of ADB. It was revealed that there was a significant
increase in the net profit margin of the bank in the year e-banking was introduced
(2011) and even though it slightly fell in the next year (2012), it increased again in
the following year (2013). It was noticed that bank operations have become more
effective and efficient.
Data gathered from the customers of ADB, through interview questionnaires
given to them, also state that e-banking was much cheaper, time-saving and faster
than the traditional ways of banking. Although problems associated with e-banking
such as lack of customer education about e-banking, constant down-time of servers,
and security issues are of concern, they believed that the benefits far outweigh
these challenges of the modern banking system.
In Kenya, e-Banking is widely accepted and used as a medium for convenient
and efficient performance of bank transactions. An example of this is internet
(online) banking and with its increased adoption, myriad of information on its nature
and scope has been made available. However, little has been known regarding the
effects of its adoption on the performance of the banking sector, specifically on
banks profitability. Hence, Kombe and Wafula (2015) attempted to raise results by
conducting a research on it.
In their study, they sought to determine the effects of (1) cheaper Internet
costs, (2) 24 hour e-banking, and (3) Information and Communication Technology
(ICT) competence of customers on financial performance of commercial banks. The
study adopted a descriptive survey design, which involved a sample of 31
employees of Kenya Commercial Bank, Treasury Square in Mombasa Kenya from its
target population of 51 respondents. Questionnaires were given and the gathered
data were analyzed using statistical tool.

24

According to their findings, majority of the respondents agree that Internet

banking has lower costs compared to that of traditional banking and thus, its
adoption reduces transaction costs. The implication of this is that it may build
distinctive competence for the bank. As a result, there is likelihood that their
customer base will expand and for profitability to increase. Also, the accessibility of
banks services round the clock through Internet banking promotes efficiency and
adds strategic advantage against competitors, leading to customer loyalty. The
results also showed that majority of the respondents consider customers
knowledge on ICT and simplicity of the application software as factors affecting the
success of Internet banking.
Based on the related studies and literature the researchers have read, the
implementation of Internet banking can lead to many financial possibilities for a
bank. The transition from traditional to Internet banking can have different impact
to banks based on how their clients reacted to it and how the banks maintain it.
There is still no certainty as to the effect, positive or negative, of Internet banking to
the financial performance of banks. Thus, the researchers will perform a financial
analysis and comparison of values to determine whether such implementation of
Internet banking will be financially successful to Philippine banks, particularly to BPI
and BDO.

Chapter 3: Research Methodology

This chapter outlines the research methodology of the study. Discussed below
are the research design, study locale, population and sampling, research

25

instruments, data gathering procedures and statistical treatment the researchers

used for the purpose of this study. Furthermore, ethical considerations regarding the
research were presented.
Research Design
The study used a combination of quantitative and qualitative research design.
Specifically, the researchers underwent a document method of gathering data on
which they had analyzed the financial statements of the banks.Moreover, actual and
projected values of Return on Assets (ROA), Return on Equity (ROE), operating
expenses and net income of the banks, from the year of Internet banking
implementation and five years thereafter, were compared for the quantitative part.
For the qualitative part, a descriptive non-structured interview was conducted with
BPIs Head for Internet Banking Operations in order to gather additional information.
However, despite a request for a similar interview with BDO, it was not
accommodated. These would be applicable and helpful on the researchers part in
gathering information about the impact on profitability of an Internet banking
system.
Study Locale
The researchers chose to conduct the study considering the two largest
banks in the country in terms of core or tier one capital adequacy ratio (CAR),
assets, solid performance and robust earnings for the year 2015, particularly the
BDO Unibank Inc. (BDO) and the Bank of the Philippine Islands (BPI) (DumlaoAbadilla, 2015). The rationale behind this decision is that the respective banks
Internet banking system are the most extensive and one of the most highly
recognized Internet banking systems in the country. Furthermore, the access to and
the availability of data and information in these two banks are most helpful for the
researchers given the limited amount of time to conduct the study.
Population and Sampling
The respondents chosen by the researchers for this study were the banks of
BDO and BPI. These two banks were fitted for the purpose of the study conducted

26

by the researchers because they were offering Internet banking for more than five
years and is available to all their valued clients.
The sampling technique that the researchers have used is the Purposive
Sampling which is under the Non-probability Sampling. Using this method, the
banks were chosen based on the criteria listed according to the purpose or objective
of the study. In addition, an appointment with the banks Heads for Internet Banking
Operations was requested beforehand for the descriptive non-structured interview.
Research Instrumentation
The researchers used a document method to meet the objectives of the
study. Secondary data in the form of the banks financial statements from years
1995 to 2005 for BPI, and 1997 to 2007 for BDO, were gathered from the database
of the Securities and Exchange Commission (SEC). The researchers also used a nonstructured interview to meet the objectives of the study. The interview was
composed of questions made ahead of time so as to give the interviewee thoughts
and ideas on what data the researchers were aiming for. The interview questions
that were asked were all related to the financial matters and the Internet banking
system employed by the banks. The researchers had prepared questions based on
pre-determined matters regarding the study, but the entirety of the interview was
not limited to those. Questions ranged from the capital investment made by the
bank in relation to Internet banking, the different Internet banking services they
offer, the current financial status of the bank, their Internet banking performance,
the risks and effects of Internet banking and the like.
Data Gathering Procedures
In order to gather the data that the researchers need to enhance their study,
the financial statements of BDO and BPI for the years mentioned above were
accessed from the database of the Securities and Exchange Commission (SEC) to
help the researchers determine the financial impact of Internet banking on the
banks financial performance.
On the other hand, the non-structured interview with BPIs Head for Internet
Banking Operations, Mr. Juan Carlos Bibat, together with Ms. Karen Floresta, was

27

scheduled at the most convenient time for the interviewee. Thus, the appointment
was set ahead of time. However for BDO, no appointment was granted to the
researchers.
The researchers then analyzed the financial information listed on the financial
statements and the non-financial information given by the Head for Internet
Banking Operations of BPI through the interview and then provided an interpretation
of all the data the researchers have gathered. Finally, the researchers then gave
their recommendations to their readers and to other aspiring young researchers.
Statistical Treatment
a. Financial Analysis - The researchers computed the different profitability ratios
like Return on Asset (ROA) and Return on Equity (ROE) of the banks in order
to assess its profitability. In addition, the researchers also took note of the net
income and operating expenses of the banks during the period considered in
the study.
b. Moving Average Method the technique used to come up with the projected
values of ROA, ROE, operating expense and net income of the banks. This
technique averages a number of recent actual values, and updated as new
values become available.
c. Shapiro-Wilk Test This method is used by the researchers to test the
normality of the data distribution of the values reflected in the financial
statements of the banks.
d. Wilcoxons

Signed-Rank

Test

non-parametric

measure

used

to

comparetworelated samples, which are the projected and actual values of the
ROA, ROE, operating expense and net income, used to test the significance of
Internet banking on the profitability of banks.

Ethical Consideration
To ensure the confidentiality of the financial information gathered and used in
the study, data was not disclosed to any outside party without the researchers or

28

banks consent. The researchers also understood the level of sensitivity this topic
has, so any financial data that the researchers had gathered was also treated with
utmost objectivity. As a means to respect the interviewees and the financial
information gathered, all data was analyzed, utilized and treated impartially.

29

Chapter 4: Presentation and Analysis of Data

This section presents the findings, results, data analysis, and discussion of
the study in line with the research objectives of this paper. These information were
obtained from primary sources in the form of BPIs and BDOs financial statements
for the years considered in the study and an interview with BPI regarding their
Internet banking practices. The studys research objective was to establish the
impact of Internet banking on the financial performance of BDO and BPI here in the
Philippines. The qualitative results were discussed following the research questions
of the study and the quantitative results were presented using tables to determine
the contribution of Internet banking on the banks financial performance.
BPI Internet Banking System Background
Bank of the Philippine Islands began to implement their BPI Express Online
system in the year 2000. This first version, as described by the interviewee, was not
yet that sophisticated at the time. The system interface was quite simple, it can
only perform limited services through the Internet, and the servers that housed the
application were not that advanced. But by the year 2006, as way of coping up with
the evolution of technology, a second version was introduced that served as an
improvement to the first system. Currently, BPI is on the testing stage of the third
version of their Internet banking system so as to further cater the changing needs
of its clients, although the year of implementation was not yet disclosed.
Due to confidentiality concerns, the company did not disclose information
regarding the investment expenditures for Internet banking for it contains sensitive
amounts that they cannot divulge to the public. But the interviewee estimated that
the amount would reach millions.
Currently, BPI offers many services through the Internet. Fund transfer in
different currencies (peso to peso; dollar to peso), bills payment, reload services for
debit cards and prepaid cards like Globe, checking of account balances, checking
credit card statements and subscriptions and the like. Most of the financial
transactions and services available in the branches are also made available through
the Internet.

30

Advantages and Disadvantages of Internet Banking

Convenience and Fast Processing

In terms of the pros and cons of this new method of banking, it can be

observed that the main advantage of Internet banking is its 24/7 convenience. Night
or day, or even during weekends, people can transact business with their banks by
simply visiting an Internet branch on the Web. Transactions can ideally be executed
and confirmed quickly although not always instantaneously. Processing time of
online transactions is roughly the same to that of transactions via the banks'
Automated Teller Machines (ATMs).

System Downtime
Despite the ease of accessibility offered by the BPI Express Online system,

the websites occasional unavailability is one of the usual inevitable problems faced
by the Internet banking system. This includes instances when the system is down,
the system is slow and accessibility to the site is difficult, which then results to
clients being unable to log-in or transact online. To handle this, BPI coordinates with
the IT team to check and monitor the situation.

Account Hacking
In addition, problems involving account security and hacking are sometimes

encountered. These problems take the form of Social Engineering and Phishing.
Social Engineering is a direct way of defrauding clients, wherein the fraudster is
somehow able to trick or fool the client into doing something, such as divulging
ones user ID and password and other account information. Although unaware or
unknown to him, there is client involvement in Social Engineering. Phishing, on the
other hand, is an indirect fraudulent scheme wherein emails claiming to be BPI are
sent to clients, asking them to disclose ones account information. These problems
would be a loss on the part of the client since all transactions are assumed to be
client-initiated and since there is client participation is these schemes. To remedy
these instances, the clients may immediately request for User ID deactivation. Since

31

deactivation is real time, access to ones account information can be immediately

restricted upon request.
Impediments Faced by Banks with Internet Banking

Account Security
In terms of what hinders BPI from successfully providing it bank services

through the Internet, it was revealed that the greatest impediment faced by BPI
Express Online is its security. Their clients become skeptical at times and are in
doubt whether their money are still well-protected because financial transactions
can now be done easily through the Internet even with people with limited
knowledge on the technology. Filipinos, in general, are conservative bank users and
still want to be issued physical receipts for every transaction. They are well-aware of
the lurking hackers that may enter the scene and conduct transactions on their
account without their knowledge which may result to a loss on their account.

Clients Preference for Branch Transactions

Another impediment on the implementation of Express Online is the lack of

knowledge and difficulty experienced by their valued clients in using it. Some of
their clients are not that young and are hesitant and cannot immediately adapt with
the fast paced technology that we have today. Admittedly, some people still prefer
the warmth of human contact despite the comforts offered by banking online. There
is this human element, the warmth of contact that comes when a client has a longstanding relationship with a bank.

Internet Speed

Mechanisms Necessary for Internet Banking

Well-organized Project Plan

When asked about the mechanisms and factors necessary for a successful

implementation of an Internet banking system, BPI disclosed that it follows a Project

32

Management Cycle. Every project and implementation has several stages. It starts
with research, checking what is needed, identifying problems that need to be
addressed and so on. When proposed developments are being presented to the
management for approval, information about the projects Return on Investment
(ROI) is usually requested. Usually, the timeframe used is five years, although this is
not fixed. For big projects such as the adoption of an Internet banking system, the
company normally foresees to recover the costs of implementation within five years
after such an implementation.
From that, management then determines the requirements for such projects.
Afterwhich, they prepare a more-detailed specification of the plan in the form of
formal documents that are sent to appropriate parties, such as to people in-charge
for pricing. Designing the system comes next, which is based on the requirements
and other factors considered in the previous phases. As the interviewee said,
designing the system should make sense, in such a way that the project should be
reasonable in terms of its cost and execution. Thus, coordination among project
team members is very vital. This is followed by the development and testing of the
actual system. Comprehensive testing, no matter how difficult it is to execute, must
be done to ensure minimal failures during the actual implementation.
Althroughout the process, it is always ensured that each level in the project
team has communication as to what is needed and what can be done so as to bring
everyone in sync. This is one of the factors to be considered from within the
organization.

Solid Technology Support

Another major factor to consider is that the technology support behind the

project should be solid. Since Internet banking is heavily dependent on technology,

skills of the IT people is of great importance. Aside from BPIs partners and internal
IT department, BPI also coordinates with external parties such Microsoft and other
vendors when needed.

Well-organized Communication Plan

33

Lastly, communication of what is new to the clients should be given attention.

No matter how perfect the other stages of the cycle were executed, if clients are not
properly informed of what is new with BPI, then the project would only be a waste. A
well-crafted communication plan is necessary for a successful implementation of
the Internet banking system.
BDO Internet Banking System Background
The researchers were able to determine BDOs year of implementation of
Electronic Banking through their website, stating that it began in the year 2002.
This was further confirmed through a phone call with their Customer Information
Desk. Unfortunately, the researchers were not able to gather information regarding
BDO's Internet banking practices, despite a number of request and follow-ups for an
interview with the said bank.
Results
Many researchers have taken interest in studying the relationship between
Internet banking and banks profitability, and different opinions and conclusions
were formed in each country. Some suggests that Internet banking has no or little
effect on the banks profitability while others say that it does have a positive impact
but it takes a time lag of at least two years before it becomes evident (Dinh, Le, &
Le, 2015).
To measure the impact of Internet banking to the profitability of the selected
banks, two sets of data were used: actual and projected data. These are composed
of the independent variables namely the net income (NI), expenses (EXP), return on
assets (ROA), and return on equity (ROE) for the years 2000-2005 for BPI and 20022007 for BDO.
Preliminary evaluation of the impact of Internet banking on the profitability of
BDO and BPI is shown in Table 1 and Table 2, respectively, found in the Appendix 1.

NI_Act

Statistic
.878

BDO
Df
6

Sig.
Statistic
.262
.963

BPI
Df
6

Sig.
.843

34

EXP_Act

.791

ROA_Act

.955

ROE_Act

.990

NI_Proj
EXP_Proj
ROA_Proj
ROE_Proj

.780

.784

.978

.943

.988

.955

.780

.943

.682

.904

.399

.898

.365

.871

.231

.938

.645

.805

.940

.659

.787

.065
.

049

039

045

Table 4.1: Shapiro-Wilks Test of BDO and BPI

Having a small sample size, Shapiro-Wilk test was used in testing the
normality of data distributionof the values reflected in the financial statements of
the banks (Table 4.1). The alpha level was set to 0.05. In using this test, the null
hypothesis is the data is normal. If the p-value is less than 0.05, the null
hypothesis is rejected. Otherwise, it is accepted.
The results of the test of normality in Table 4.1 showed that some of the data
were not normal for BDO and BPI (see the highlighted values in the table). In
addition, the sample size for both is relatively small thus the researchers used a
non-parametric method, Wilcoxons Signed-Rank Test, to compare the two related
samples- projected and actual data. Also, this test is used to evaluate the
significance of the differences in values to the profitability of banks. The alpha level
was set to 0.05.

Z
Asymp. Sig. (2tailed)

NI_Proj - NI_Act
-2.201b

EXP_Proj EXP_Act
-2.201b

ROA_Proj ROA_Act
-.943b

ROE_Proj ROE_Act
-1.572b

.028

.028

.345

.116

Table 4.2: Test of Statistics (Wilcoxons Signed-Ranks Test for BDO)

The independent variables ROA and ROE were used to determine whether
Internet banking does have a positive impact on profitability. For BDO, as shown in
Table 4.2, Z is -0.943 (based on positive ranks) when ROA actual is subtracted from
ROA projected.This means ROA actual is greater than ROA projected. The p-value is
0.345, which is not less than 0.05 therefore, the null hypothesis is acceptedInternet banking does not have a positive impact on the profitability of BDO.

35

Meanwhile, the difference of ROE projected and ROE actual in Table 4.2
resulted to a value of -1.572 (based on positive ranks), which means the actual
value is greater than the projected. With a p-value of 0.116, which is not less than
0.05, the null hypothesis is accepted - Internet banking does not have a positive
impact on the profitability of BDO.
To determine the effect of Internet banking on the operating expenses of
selected banks, the actual and projected operating expense values were compared.
As shown in Table 4.2, Z is -2.201 (based on positive ranks)when Expense actual is
subtracted from Expense projected.This means Expense actual is greater than
Expense projected. The p-value is 0.028, which is less than 0.05. Thus, the null
hypothesis is rejected. This implies that Internet banking does reduce the operating
expenses of BDO.
The effect of Internet banking on the net income of selected banks was also
determined by comparing the actual and projected net income values. In Table 4.2,
the difference of NI projected and NI actual resulted to a value of -2.201 (based on
positive ranks), which means NI Actual of BDO is greater than NI projected. The pvalue is 0.028, which is less than 0.05 thus, rejecting the null hypothesis. This
implies that Internet banking increases the income of BDO.

Z
Asymp. Sig. (2tailed)

NI_Proj - NI_Act
-1.363b

EXP_Proj EXP_Act
-1.153b

ROA_Proj ROA_Act
-.314c

ROE_Proj ROE_Act
-.105b

.173

.249

.753

.917

Table 4.3: Test of Statistics (Wilcoxons Signed Ranks Test for BPI)
The same test was used for BPI.As shown in Table 4.3, Z is -0.314 (based on
negative ranks)when ROA actual is subtracted from ROA projected. This means that
ROA actual is greater than ROA projected. The p-value is 0.753, which is not less
than alpha level of 0.05. Thus, the null hypothesis is accepted - Internet banking
does not have a positive impact on the profitability of BPI.
Based on the results in Table 4.3, the difference of ROE projected and ROE
actual resulted to a value of -0.105 (based on positive ranks), which means the
actual value is greater than the projected. With a p-value of 0.917, which is not less

36

than 0.05, the null hypothesis is accepted - Internet banking does not have a
positive impact on the profitability of BPI.
When Expense actual is subtracted from Expense projected, Z is -1.153
(based on positive ranks) as shown in Table 4.3. The Expense actual is greater than
Expense projected. The p-value is 0.246, which is not less than 0.05 therefore, the
null hypothesis is accepted- Internet banking does not reduce the operating
expenses of BPI.
Also, as shown in Table 4.3, the difference of NI projected and NI actual
resulted to a value of-1.363 (based on positive ranks), which means NI Actual is
greater than NI projected. The p-value is 0.173, which is not less than 0.05. Thus,
accepting the null hypothesis - Internet banking does not increase the income of
BPI.
In general, as shown in the results, the actual values for ROA and ROE are
greater than the projected values of both banks but the differences do not show a
significant relationship between Internet banking and the banks profitability. With
regards to both net income and operating expenses, the differences are both
significant in BDO. Meanwhile, the results for BPI showed no correlation between
Internet banking and its effect in reducing operating expenses and increasing net
income.

37

Chapter 5: Summary, Conclusion and Recommendation

Internet banking is a promising delivery channel in the Philippines and the
purpose of this paper is to fill the gap of the lack of studies in this particular
discipline. This article used the data of the two largest banks in the Philippines to
strengthen and expand these findings.
Summary of Findings
The researchers aimed to find out whether Internet banking has an effect on
the profitability of two banks, namely BDO and BPI. The focus of the study is the
different factors that affect the profitability of the said two banks, namely the banks
net income, operating expenses and return on assets and return on equity. Through
conducting an interview with the Internet Banking Head of BPI and obtaining and
analyzing the financial statements of both banks, the researchers have gathered
both qualitative and quantitative data needed for the study. The banks were chosen
given the fact that they are currently the two largest banks in the Philippines in
terms of profitability. The years considered for the study were 1995 to 2005 for BPI
and 1997 to 2007 for BDO for these years represent the time before and after the
Internet banking for these banks were implemented.

The researchers used the

banks financial statements during the years aforementioned to compute for the
actual and projected ROA, ROE, operating expenses and net income of the
banks.The actual and projected values were then compared. Statistical tools used to
further the researchers analysis include the Moving Average Method to project the
values, Shapiro-Wilks test to identify the normality of the data gathered and
Wilcoxons Signed Ranks Test to identify the significance of the difference between
the actual and projected values, thus helping the researchers in deciding whether to
accept or reject the null hypotheses.
The results using the qualitative part of our research show that the Internet
banking has advantages and disadvantages. Its advantages range from 24/7 service
catered to all clients transactions can be now be processed instantaneously and
service is made convenient for the public. For its disadvantages, Internet banking
may lead to some unexpected downtime of the server, different fraudulent schemes
like social engineeringand fishing. Meanwhile, the greatest impediment faced by a

38

bank in providing their services through the Internet is its security. Filipinos are still
in doubt whether the bank can still protect their account and money from the
lurking hackers that may enter the scene. In addition to security, the lack of
knowledge of account holders made it difficult for them into entering express online
transactions. In tackling the mechanisms necessary for a successful implementation
of Internet banking, BPI revealed that it follows a project management cycle. The
project team prepares a detailed specification of the plan and then is sent to
appropriate parties for approval. In

addition, continuous maintenance and

monitoring must be done to ensure minimal failures on actual implementation. But

most importantly, Internet banking must be supported with a solid technology from
the skills of the IT team. Aside from this team, the bank also coordinates with
external parties to create a solid foundation for the Internet banking. Lastly, proper
communication

with

the

clients

also

plays

big

part

in

the

successful

implementation of Internet banking because the project would be a waste if the

clients do not know about it and are not using it.
Conclusion
By using different tests to measure the impact of Internet banking on BDO
and BPI in its profitability, specifically in terms of changes in ROA and ROE,
reduction in operating expenses and increase in net income, the researchers were
able to establish the following results:
Regarding the ROA and ROE, the researchers have come to a decision to
accept the null hypothesis Internet banking has no significant positive impact to
the profitability of the banks, for both BDO and BPI. The significant difference of the
values for ROA and ROE for both banks resulted to a p-value of less than 0.05.
Concerning both the net income and expenses for both banks, it resulted to
different results. For BDO, the p-value is less than 0.05, rejecting the null hypothesis
and leading to a conclusion that Internet banking does reduce the operating
expenses for BDO. In contrast, the p-value for BPIs operating expenses resulted to a
figure greater than 0.05, leading to accept the null hypothesis.
After considering all these factors, the researchers concluded that despite the
significant changes in net income and expenses of BDO after the implementation of

39

Internet banking, these changes cannot be fully attributed to such implementation.

There may be other factors that could have caused these changes, but Internet
banking cannot be fully credited for these. For BPI, it was evident that the
implementation of the Internet banking system did not result to any significant
impact for its profitability.
Recommendations
The researchers recommend that BPI and BDO continue implementing
Internet banking in their ongoing service as a complement to the traditional banking
services and make some improvements. With regards to the sample size, period
considered and methods of projecting used, the researchers recommend increasing
the number of banks considered as sample size, extending the period considered
and use different projection methods to compare the data. Lastly, the researchers
recommend that the banks strengthen the security of the bank's internal server
because the number one problem for Internet banking.

40

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44

Appendix 1

45

Std.
N
NI_Act

EXP_Act

ROA_Act
6

ROE_Act
6

Mean

EXP_Proj

ROA_Proj
6

ROE_Proj
6

Minimum

Maximum

2940809198. 2047460192. 1057404726. 6570330000.

333

3857

9097449312. 8351238532. 2855422636. 24760411000

167

7731

.0

01099362235 00110835275 00925033064 01230568638

9531

7745

81594

87103

11372274486 01738195579 08697755882 13788811946

2390

NI_Proj

Deviation

5973

1419689794. 892207038.6
056

184

58116
478302683.7

06759
2835342333.
3

3901700337. 2197457642. 1807681542. 7762518333.

222

1394

00995728247 00184295184 00686555777 01191243537

9499

8216

80472

66717

09533021293 02742409968 05353310794 12442037985

8804

4600

83707

27188

Table 1: Descriptive Statistics of BDO

N
NI_Act

EXP_Act

Mean

Std. Deviation Minimum

Maximum

5728878500.

1820448644.

3051532000.

8554000000.

000

8440

12797400166 1331502849.

11634000000 15382000000

.667

.0

6526

.0

46

ROA_Act

.
6

ROE_Act
NI_Proj

EXP_Proj

6
6

ROA_Proj
6

ROE_Proj
6

01375994301 00222258731 01043557835 01710866723

6978

4390

36249

80223

.112

.0237

.1

.1

4683912277.

756998237.0

3895577000.

5838333333.

778

445

11368043055 1784884944.

8333600000.

13059333333

.556

4307

.3

01528952489 00344867418 01238647248 02176003713

5177

9008

36534

18430

11906466788 02620116343 09743293735 16954638429

3590

5232

Table 2: Descriptive Statistics of BPI

65693

79687

47

Appendix 2

UNIVERSITY OF SANTO TOMAS

Alfredo M. Velayo College of Accountancy
Academic Year 2015-2016
March 12, 2016
Mr. Carlo S. Gatuslao
Vice President and Division Head
BPI Digital Channel Management
6768 Ayala Avenue
Makati City 1226, Philippines
Dear Mr. Gatuslao:
Greetings in the name of Saint Thomas Aquinas!
We are students from the University of Santo Tomas AMV - College of
Accountancy, working on a thesis paper entitled The Impact of Internet
Banking on the Profitability of Banks in the Philippines. In line with this, we
would humbly like to request for a recorded interview with you about your
company and matters regarding BPIs Internet/Internet banking operations,
on Monday or Tuesday, March 21 or 22, 2016 at 10 oclock in the morning.
Moreover, in order to accomplish the other objectives of our study, we would
also like to request for the copies of the banks Financial Statements for the
years ended 1995 to 2000 (five years before and five years after your
implementation of the Internet banking system).
The interview and the request for the Financial Statements are solely for the
partial completion of our research paper in Thesis Writing (Thesis1&2).
Information that will be gathered from you will not be used against the
companys management and will not be disseminated to the public without
your permission.
Should you have any concerns with the schedule, you may contact us at:
Elaine Tuazon
:
09358480914 /
elainetuazon14@yahoo.com
Iris Mae Uri
:
09055082251 / u.irismae@yahoo.com
Miguel Riggs Yusi :
09055280693 / dmiguelriggs@gmail.com
Marc Jerome Rillo :
09055082251 / marc_rillo@yahoo.com.ph
Alfredo Cayabyab :
09264891470 / alfredo_bacani@yahoo.com

48

Attached herewith are the sample interview questions that our group will be
asking in order to gather the data that we will need.
Thank you in advance for your time and concern.
Respectfully yours,
Elaine Tuazon
Group Representative
Noted by:
Dr. Ma. Evangeline Lopez-Paraan
Thesis Professor

49

Greetings Mr. Gatuslao!

We are students in Thesis Writing, a research methods class that is part of
our required subjects in UST AMV College of Accountancy. We are currently
writing a thesis paper entitled, The Impact of Internet Banking on the
Profitability of Banks in the Philippines. To further improve our study, we will
be needing your help and expertise regarding the said topic through an
interview.
We have prepared the following focus areas that will be of greatest help to
our study. The questions include, but are not limited to, the following:

When did your bank start to implement the use of Internet banking system?
(year of introduction)

How much was the investment expenditure needed for the introduction of the
Internet banking system?

How long does the company foresee to recover the cost of capital in
employing the Internet banking system? (in terms of years)

How did the bank employees and the bank

implementation of the Internet banking system?

What do you think are the mechanisms or factors necessary for a successful
implementation of an Internet banking system?

What are the problems encountered in using an Internet banking system and
what measures are used to correct such problems?

What are the different bank services that you offer through the Internet?

What do you think are the impediments in the provision of banks of their
services through the Internet?

Do you keep separate records of transactions conducted through the

Internet?

How do banks earn profit when they conduct transactions through the
Internet?

How does the Internet banking system contribute to the profitability of the
bank? (ex. Increase in sales, customers, costs etc.)

What percentage or level of income does the Internet banking system

contribute to the bank?

Did the bank experience an increase or decrease in profit during the first year
of the implementation of Internet banking?

clients

react

to

the

50

Did the bank experience an increase or decrease in operating expenses

during the first year of the implementation of Internet banking?

On average, how much does it cost to conduct a transaction via bank teller?
via ATM? via banks Internet portal?

Do you think there is a relationship between the banks adoption of an

Internet banking system and the banks profitability? (Direct, indirect or no
relationship)

Are the benefits of utilizing such a system outweighing the costs of using it?

Is an Internet banking system a good investment? Why/why not?

Should you have any questions or concerns, you can reach us at any of the
contact numbers provided in the letter. Rest assured that your answers will
be treated with utmost confidentiality and objectivity.
Thank you very much for your kind consideration! We are hoping for your
positive response regarding this matter.