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CHAPTER I: INTRODUCTION0. BackgroundThe Internet is considered an effective instrument used by the banking sector in providing e-services for banking customers. Along with the development of Information and Technology, Internet Banking services have become ideal alternatives among banking customers, compared to other services such as phone banking or over-the-counter transactions at banks (Kenova and Jonasson, 2006). Banks, with the utilization of Internet banking can maintain a tight relationship with their clients, quickly respond to the market demand and reduce operating costs thanks to online applications on their website (DeYoung et al., 2007). Using Internet Banking services, banking customers can reduce the time and cost of doing transactions, update account information more frequently and increase their privacy (Scullion and Nicholas, 2000). The usefulness of Internet Banking has led to the high competition among banks; and they have tried to improve the quality of Internet Banking services to satisfy their customer needs. Internet Banking Service Quality, thus, becomes an important part of studies on the banking sector.

Internet Banking services in Vietnam have been provided by some banks; however, Internet Banking remains immature and has not been utilized effectively in Vietnam. This study thus evaluates the factors affecting Internet Banking Service Quality from bank customer perspectives in Vietnam. Therefore, this study is conducted based on bank customer perspectives to answer the research question.

Numerous research has been done in the banking industry; however, most those studies emphasized on traditional banking services rather than on Internet Banking services (Yavas & Benkenstein, 2001). Moreover, among studies on Internet Banking services, not many studies were conducted in developing countries, such as Vietnam. As a result, this research is to examine the determinants of Internet Banking Service Quality in Vietnam.

0. Overview of the Banking Industry in Vietnam Vietnams banking sector is ranked among countries, whose banking sector have the highest growth rates in Asia thanks to their continuous economic expansion, rise in household income and low penetration of banking services. Since the mid-1980, the banking sector in this country has undergone a series of reforms, with the aim to modernize the industry and move towards the market-oriented economy (World Bank, 1995). These reforms prompt the country to participate in international agreements and ongoing efforts; in which Basel capital framework is one of the main standards adopted by Vietnamese banks. Some of the key reforms can be cited are restructuring of the banking system, the partial privatization of state-owned banking institutions or measures to boost the capitalization of Vietnamese banks.

In Vietnam, there are over 80 credit institutions consisting of 5 stated-owned banks, 37 joint stock banks, 35 branch offices of foreign banks, 4 joint venture banks, 1 policy banks, 1 central credit fund and 14 non-banking credit institutions (The State Bank of Vietnam, 2013). Figure 1-1 shows the changes in the Vietnamese banking system in 2011 and 2012.Table 1-1: The Vietnamese banking system in 2011 and 2012

Source: (The State Bank of Vietnam, 2013)The growth rate of the banking system in developing countries like Vietnam is typically measured by the GDP growth (around 15%); and this industry plays a vital role in the economy. It is indicated that there will be high demand for banking services in Vietnam, with a population exceeding 80 million (Wang & Pho, 2009). There are only 2% of the total population taking out a bank loan; only 5 million citizens have a personal bank account; and the number of credit card holders in Vietnam has risen to 300% since 2004 (till the end of 2013, 2 million people in Vietnam use credit card (HS Global INC, 2013). It can be said that the Vietnamese banking industry is still at the beginning step of development, with low GDP per capita (more than 1,000 USD per year) and low bank assets per capita (HS Global INC 2013). This brings many opportunities for bankers, especially in the Internet Banking area.

0. The development of Internet Usage in VietnamVietnamese banks have only applied the Internet to their banking activities for more than 15 years since mid-1998 (Vietnam Internet Network Information Center, 2012) and show the upward trend from year to year. Figure 1-2 shows that at the end of 2012, there was approximately 32 million Internet users (Vietnam Internet Network Information Center, 2012) and the trend is upward.Figure 1-1: Increase in The Number Of Internet Users in Vietnam From 2003 2012

Source: (Vietnam Internet Network Information Center, 2012)Figure 1-1 shows that the Internet is developing drastically in Vietnam, and this development brings a lot of benefits to the spread of Internet banking services to more and more areas in Vietnam. It might also affect the customers behavior and change their attitude towards traditional banking services.

Figure 1-2 shows that the vast majority of business in Vietnam use ADSL to connect their Internet, and only 8% of them use other forms of Internet Connection. This proportion implies that there is a synchronization between businesses in Vietnam in applying Internet Connection to their operations.Figure 1-2: Forms of Internet Connection used in Businesses in Vietnam 2012

Source: (Ministry of Industry and Trade of the Socialist Republic of Vietnam, 2013)

0. Internet Banking Services in VietnamThe Internet was only applied in Banking services not long ago. The Modernizing the banking and payment systems project, which was funded by the World Bank, has helped the Vietnamese banking sector reach some achievements. The whole banking system has been put into a modernized system of extensive information and technology. The project creates a connection to over 50 credit institutions and their 220 branches in 5 big cities (Hanoi, Haiphong, Danang, Ho Chi Minh, Can Tho) and handles 5,625 banking transactions per day nationwide, with each value at approximately 10,05 billion VND (International Business Publications, 2008). Figure 1-3 shows that Internet banking in Vietnam is on a drastic rise. From 2010 to 2011, the number of visitors to Internet banking websites increased by 35% (Nguyen, 2011), which is a very fast growth compared to other countries in Southeast Asia. However, there is no standard for Internet banking in Vietnam, each bank has its own system for banking purposes. Figure 1-3: Online Banking On The Rise in Southeast Asia in 2011

Source: (Nguyen, 2011)Foreign and joint-venture banks are the leading banks to operate Internet banking in Vietnam, and their systems are computerized to attract consumers and create a linkage between banks in the whole banking system (Wang & Pho, 2009).

In general, Internet banking Usage in Vietnam is unequal to the technological infrastructure and the banking system in this country (Wang & Pho, 2009). When a service or product is launched, there will be competition between banks in the industry. Therefore, in order to attract more customers and remain in the same position in the industry, banks have to improve the product and service quality.

0. Problem StatementWith the appearance of the Internet, the Vietnamese banking industry has been experiencing an aggressive competition. These competitions have created motivations for banks to adopt new technologies such as mobile banking, phone banking and especially Internet Banking (Leung, 2009). The main purpose of banks is to increase the speed of banking transactions and satisfy the increasing demand of bank customers. The problem is that most of the services offered by Internet Banking have not met customers expectations. The reason for this mismatch is presented as three problem statements below:

Firstly, Low Responsiveness is the most common problem of Internet banking service quality in Vietnam. The limited quality of Information and Technology (IT) Infrastructure on Vietnamese banking system makes it harder for banks to run their Internet banking system smoothly. Therefore, the speed of delivery information to Internet banking customers is only at a low level, which reduces the willingness of Banking customers to use Internet banking services (, 2012).

Secondly, Low Security is another problem of Internet banking service quality in Vietnam. The low quality of IT system and limited ability of bank staff affect the safety of bank accounts, for example, hackers take advantages of the confirming process on the system to steal the information of banking customers. In fact, some incidents related to bank hackers has affected banking customers reliability on Internet banking and made them avoid to use this service (Nga, 2012).

Thirdly, Low Efficiency is a problem that many banks in Vietnam face when providing Internet banking service to their customers. Banking websites of Vietnamese banks are considered poor styles and not easy to use. Due to the low knowledge of Vietnamese customers of the Internet (especially old people and people living in rural areas), the ability to deliver accurate and specific information on bank Websites is really low. Some bank websites are usually on the status of maintenance, which creates an unfavorable feeling for users and affect their needs and wants.

Although there are some challenges, Vietnamese banks are increasing their adoption of Internet banking services. Internet Banking has been used in Vietnamese banks for more than 15 years (Vietnam Internet Network Information Center, 2012), however, very little research has been conducted in this area. This research, therefore, tries to fill this empirical gap by ientifying the determinants of Service Quality in Internet Ban