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The Impact of Internet-Banking on Brick and Mortar Branches: The Case of Turkey

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Abstract

The increased adoption and infiltration of the Internet has recently redefined the playground for retail banks. Retail banks are now offering their services primarily through their Internet banking branches. The repercussions of this change to “brick and mortar” banks have been studied in the context of developed market economies. In this paper, we contribute to the literature by studying the impact of Internet banking adoption on banks’ deposit collection, lending activities, and performance in an emerging market setting. By using a panel of 18 retail banks that operate in Turkey from 1990–2008, we demonstrate that Internet banking adoption has a positive impact on the level of profits, deposits and loans per branch. As operational activities are now provided via Internet branches, Internet banking facilitates banking activities in branches that require more human input. We also find that Internet banking adoption has a negative impact on bank profitability after 2 years of adoption as Internet banking increases competition and results in lower interest income. Accordingly, Internet banking complements brick and mortar branches.

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Notes

  1. Zilberfarb (1989) and Daniels and Murphy (1994) respectively show that availability of ATMs and use of technology affect demand deposits and transaction balances held by the households.

  2. Chaffai et al. (2001) show that environmental differences across countries in Europe influence productivity gains from technological advancements.

  3. He does not specify which emerging markets’ banks were analyzed in the study.

  4. Alper and Öniş (2004) provides a detailed analysis of the structure of the Turkish banking sector from 1988–1999.

  5. Please refer to Alper and Öniş (2004) for a more detailed discussion of banking sector developments in the Post-1990s era in Turkey.

  6. Please see Alper (2001) for a detailed discussion of the liquidity crisis and IMF-backed stabilization program of Turkey. Akyuz and Boratav (2002) also comment on the design flaws of the program and its implications for the Turkish crisis of 2000–2001.

  7. Abbasoglu et al. (2007) provide a detailed list of banks that were acquired by the Deposit Saving Insurance Fund (TMSF), banks that were merged, and banks whose licenses were revoked in the aftermath of the crisis.

  8. Available online at www.tbb.org.tr.

  9. Of the 14 banks that were not included in our sample, 8 banks engaged in only corporate banking without an Internet branch, 2 banks didn’t have an Internet branch, and we were unable to retrieve adoption dates and details for the remaining 4 banks.

  10. Caprio et al.’s (2005) index does not cover the year 2005 and afterwards; we use our own observations regarding the state of the Turkish banking system and economy in populating the data point for this year.

  11. DEPOSITTA is not included as an explanatory variable in the estimation of this equation.

  12. LOANTA is not included as an explanatory variable in the estimation of this equation.

  13. PERNO is not included as an explanatory variable in the estimation of this equation.

  14. Following Hernando and Nieto (2007) INTERNET dummy is the transformation of a transactional internet banking dummy, which equals 1 if the bank has a transactional website and 0 otherwise.

  15. BRANCHNO is included only to regression estimates of BRANCHPROFIT, BRANCHDEPOSITS and BRANCHCREDIT measures to account for the changes in these ratios due to changes in the number of bank branches.

  16. We also construct a crisis dummy following De Haas, and Van Lelyveld (2010), where we define crisis period as [t, t + 2] with t being the start of the crisis period. Our results remain the same.

  17. Hausman (1978) test confirms use of fixed effects.

  18. We define a bank as foreign if the share of the foreign ownership exceeds 50.01% following IFRS standards.

  19. For foreign banks that are not listed on the local stock exchange even though their parent holding company is listed on the stock exchange of another country, this variable takes a value of zero.

  20. Instruments for INTERNET dummy is obtained using the transactional internet dummy in the probit equation as in Hernando and Nieto (2007). The listed, foreign and large dummies significantly enter the equation with a positive coefficient, while state dummy significantly enters with a negative coefficient. The correlation between the transactional internet dummy and the fitted value of the random probit model is 0.59.

  21. We used three unit root tests namely, Levin et al. (2002) test, Im et al. (2003) test, and Fisher (1932) test for unbalanced panel.

  22. The relevant χ 2 values for Levin, Lin and Chu(2002) test are ROA = 94.89, ROE = 100.57, DEPOSITTA = 64.87, NONINTINC = 83.91, BRANCHPROFIT = 83.73, BRANCHCREDIT,=-7.67825, BRANCHDEP = -8.08447, NPLOANS = -1.24458, BRANCHNO = 1.90450 PERNO = 48.98, and INTINC = 40.75.

  23. The STATA code for Petersen(2009) estimation can be downloaded at: http://www.kellogg.northwestern.edu/faculty/petersen/htm/papers/se/se_programming.htm.

  24. Standard errors of the FE model with firm level clustering is higher than the White Standard errors, while we find no such result for year level clustering and hence we prefer to use 1 dimension clustering rather than 2.

  25. We cannot carry out the same analysis for interest paid on deposits by banks due to unavailability of data.

  26. Results not reported here, but available upon request.

  27. Please see Claessens et al. (2001).

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Acknowledgements

The authors would like to thank Stijn Claessens, Daniel Nolle, the participants of the 37th Eastern Economic Association Meeting in New York 2011, the participants of 18th Multinational Finance Society Meeting in Rome 2011 and an anonymous referee for their valuable comments and assistance in the writing of this paper.

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Authors and Affiliations

  1. Department of MIS, Bogazici University, Hisar Campus, Bebek, 34342, Istanbul, Turkey

    Ceylan Onay

  2. Center for International Policy Studies (CIPS), Fordham University, Dealy Hall 5th Floor, 441 East Fordham Rd, Bronx, NY, USA

    Emre Ozsoz

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  1. Ceylan Onay
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  2. Emre Ozsoz
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Correspondence to Ceylan Onay.

Appendix

Appendix

Table 7 Box A.1 Data definitions and sources
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Onay, C., Ozsoz, E. The Impact of Internet-Banking on Brick and Mortar Branches: The Case of Turkey. J Financ Serv Res 44, 187–204 (2013). https://doi.org/10.1007/s10693-011-0124-9

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