A CROSS-COUNTRY ANALYSIS OF THE EFFECTS OF E-BANKING AND FINANCIAL INFRASTRUCTURE ON FINANCIAL SECTOR COMPETITION: A SCHUMPETERIAN SHIFT? By Jennifer Isern A DISSERTATION Submitted to H. Wayne Huizenga School of Business and Entrepreneurship Nova Southeastern University in partial fulfillment of the requirements for the degree of DOCTOR OF BUSINESS ADMINISTRATION 2008 3301304 3301304 2009 Copyright 2008 by Isern, Jennifer All rights reserved A Dissertation Entitled A CROSS-COUNTRY ANALYSIS OF THE EFFECTS OF E-BANKING AND FINANCIAL INFRASTRUCTURE ON FINANCIAL SECTOR COMPETITION: A SCHUMPETERIAN SHIFT? By Jennifer Isern We hereby certify that this Dissertation submitted by Jennifer Isern conforms to acceptable standards, and as such is fully adequate in scope and quality. It is therefore approved as the fulfillment of the Dissertation requirements for the Degree of Doctor of Business Administration. Approved: Paul Dion, Ph.D. Date Chairperson Barry Barnes, Ph.D. Date Committee Member Ira Lieberman, Ph.D. Date Committee member Russell Abratt, Ph.D. Date Associate Dean of Internal Affairs J. Preston Jones, D.B.A. Date Executive Associate Dean, H. Wayne Huizenga School of Business and Entrepreneurship Nova Southeastern University 2008 CERTIFICATION STATEMENT I hereby certify that this paper constitutes my own product, that where the language of others is set forth, quotation marks so indicate, and appropriate credit is given where I have used the language, ideas, expressions or writings of another. Signed_____________________________ Jennifer Isern ABSTRACT A CROSS-COUNTRY ANALYSIS OF THE EFFECTS OF E-BANKING AND FINANCIAL INFRASTRUCTURE ON FINANCIAL SECTOR COMPETITION: A SCHUMPETERIAN SHIFT? by Jennifer Isern New forces are taking hold in the financial services industry that may change existing competition paradigms. Electronic banking is thriving in Japan, Europe, South Africa, the Philippines, and the US as clients click their mouse, press telephone keys, and slide cards to conduct their banking. In parallel, credit registries reduce information asymmetry and contribute to lower costs and increased lending volume. Increasingly, banks and other financial service providers are starting to launch many of these same innovations in developing countries. Emerging markets are in the position of developing financial infrastructure that could leapfrog those in established markets and provide a broader range of financial services for clients. Financial services may be entering a period of Schumpeterian competition in which electronic banking and financial infrastructure may fundamentally change the global financial services industry. To identify the cross-country determinants of competition, panel data on 1,514 banks was gathered from the BankScope database of financial statements for 2004-2006 for a range of banks from 185 countries. Applying the Panzar and Rosse (1987) model for competition, this study determined the effect of e-banking and financial infrastructure on bank competition. Other classic factors of competition such as country-level factors, financial sector policy, and client factors were also analyzed. The research findings include a positive relationship between the level of financial infrastructure and the level of competition and a negative relationship between the degree of state ownership in a banking sector and the level of competition. This study helps to extend competition theory to include electronic banking and financial infrastructure. Keywords: banking, competition, electronic banking, financial infrastructure, credit registries, payment systems, financial services, financial sector development. ACKNOWLEDGEMENTS “The more I learn, the more I realize I don’t know.” Albert Einstein I feel incredibly fortunate that my dissertation committee consisted of Dr. Paul Dion, Dr. Barry Barnes, and Dr. Ira Lieberman. These three gentlemen generously shared their time, expertise, guidance, and encouragement over the past year. I am grateful for their invaluable contributions that led to higher quality research and my deeper understanding of the issues and research findings. The Staff and Faculty of the Doctoral Program have given me wonderful assistance and encouragement throughout my classes and dissertation research. I would like to thank those dear souls who kept me afloat with their love, support, enthusiasm, and patience throughout this endeavor. I am grateful to Elizabeth, Mom, Lori, Pam, Brian, Doug, and many more family, friends, and colleagues. Finally, I offer my heartfelt gratitude to my mother, father, grandmother and grandfather, who shared their love of reading and learning with me from my earliest memories. In their own special ways, they each showed me that education and lifelong learning truly is the key to the future. vi TABLE OF CONTENTS List of Tables ix List of Figures x Chapter 1. INTRODUCTION 1 Introduction 1 Background 2 Purpose and justification of the study 3 Research outline 6 Problem statement 6 Research question 6 Research model 6 Conclusion 8 2. LITERATURE REVIEW 9 Introduction 9 The role of the financial sector 10 Concentration and competition 15 Measuring competition and concentration 16 Mitigating factors for competition 18 Market structure 20 Payment systems 22 Credit registries 23 Authorized scope of financial services 25 Foreign ownership 26 State ownership 28 Geographic concentration 30 E-banking 30 Building blocks of e-banking 31 Experience in developed markets 35 Pilots in emerging markets 42 Factors influencing the adoption of e-banking 46 Institutional factors 47 Clients 50 Government’s role: Regulation and infrastructure 53 Effects of e-banking and payments infrastructure on efficiency and competition 56 Cost and economies of scale 56 vii Client service 61 Conclusion 62 3. METHODOLOGY 65 Introduction 65 Research question 65 Hypotheses 65 Research design 68 Variables and sources of data 70 Dependent variable 70 Independent variables 70 Data collection 78 Data coding 79 Population 79 Data analysis 80 Analytical and statistical techniques 80 Treatments 80 Analysis 80 Assumptions and limitations 83 Conclusion 85 4. ANALYSIS AND FINDINGS 87 Introduction 87 Presentation of the data 87 Descriptive statistics 89 H-statistic 89 Market equilibrium statistic 93 Determinants of competition indicators 96 Results of hypothesis testing 99 Hypothesis 1 100 Hypothesis 2 101 Hypothesis 3 102 Hypothesis 4 103 Hypothesis 5 103 Hypothesis 6 104 Summary of hypothesis testing 105 Conclusion 106 5. SUMMARY AND CONCLUSIONS 107 Overview of significant findings 107 Implications of this study to current theory in the discipline 109 Limitations of this study 110 Implications of the findings for market players 113 viii Recommendations for future research 114 Conclusion 115 APPENDICES 1. Frequency tables 116 2. Correlation matrices 118 3. H-statistics of banking system for selected countries 124 4. Market equilibrium statistics of banking system for selected countries 132 5. Distribution tables 137 REFERENCES CITED 142 ix LIST OF TABLES Table 1. Common e-banking services 33 2. Bank and retailer costs per payment transaction 58 3. Description and definition of financial service provider variables and data sources 70 4. Description and definition of country-level variables and data sources 72 5. Description and definition of variables and data sources to calculate market equilibrium per country 84 6. Regression results: Cross-country determinants of H-statistic 97 7. Summary of hypotheses, testing and statistical technique 105 8. Variable frequencies to calculate the H-statistic 117 9. Variable frequencies to calculate the market equilibrium statistic 117 10. Correlation matrix for variables to calculate the H-statistic 119 11. Correlation matrix for variables to calculate the market equilibrium statistic 120 12. Correlation matrix for cross-country determinants of competition 121 13. H-statistics of banking systems for selected countries 125 14. Countries where H-statistic is not significantly different from zero 129 15. Countries where H-statistic is not significantly different from one 130 16. Market equilibrium statistics of banking systems for selected countries 133 17. Distribution of variables for cross-country determinants of competition 138 18. Skewness, kurtosis and Kolmogorov-Smirnov test for cross-country determinants of competition 139 [...]... level of e-banking and national financial infrastructure Additional details on this model are provided in Chapter 3 Variables included bank revenue, a range of costs, branch infrastructure, level of country economic development, disparity of national income, concentration of the financial sector, level of e-banking, national financial sector policy, coverage of credit registries, national financial and. .. International Settlements, and the United Nations Variables and their corresponding sources of data are reviewed in detail in Chapter 3 8 Conclusion The financial sector carries strategic importance for national and international economic stability and development Of the many measures of financial sector health, competition is one of the more complex factors to analyze Given rapid technological advances,... electronic banking and financial infrastructure may fundamentally change the financial services industry at a global and national level This research investigated the factors that affect banking competition globally and extend existing research to incorporate the effects of e-banking and financial infrastructure 9 CHAPTER 2 LITERATURE REVIEW Introduction The health of the financial services industry affects... ownership, and geographic concentration on bank concentration and competition, as discussed in Chapter 2 Purpose and Justification of the Study This study contributes to financial sector research and policy by investigating the effect of electronic banking and financial infrastructure on financial sector competition across selected developed and developing countries The implementation of e-banking has the. .. registries, and payments platforms 5 E-banking and payment systems may have surprising effects on competition in the financial sector, including costs and economies of scale, new entrants and institutional competition, and customer demand for higher service quality E-banking can substantially increase the number of transactions and clients that a firm can manage, and this leads to efficiency gains (Humphrey... industry overall Concentration and Competition Within an existing regulatory environment and given national government control of inflation and monetary policy, competition and concentration determine bank behavior and the countenance of appropriate risk levels Bank concentration and competition, both core elements of market structure, are key drivers affecting financial sector performance (Chandler, 1938;... forces are changing as deregulation allows broader scope of services, geographic operations, and mergers at the national and international level In parallel, new technologies in back-office systems and front-office interactions with clients are increasing efficiency and opening new frontiers in financial services The next section turns to an examination of concentration and competition in the banking... to the effects of electronic banking and financial infrastructure on financial sector competition Research Question How do electronic banking and financial infrastructure influence competition in the financial services industry across selected developed and developing countries? Research Model The Panzar and Rosse (1987) model explores competition by analyzing the elasticity of bank profit to the bank’s... Further, banks are caught in a web of asymmetric information concerning both borrowers and depositors, which may lead to adverse selection and/ or moral hazard that negatively affects the bank’s lending portfolio (Guzman, 2000) Conversely, depositors rarely understand the financial health of their bank, and are vulnerable to bank failure and loss Negative financial sector effects strongly affect market economies,... influencing the adoption of e-banking and credit registries Section four reviews effects to date of e-banking and credit registries on efficiency and competition in financial services Section five concludes The Role of the Financial Sector Banks and other regulated financial service providers mobilize deposits, allocate credit, process money transfers, and provide other related services The health of the financial . Jennifer All rights reserved A Dissertation Entitled A CROSS-COUNTRY ANALYSIS OF THE EFFECTS OF E-BANKING AND FINANCIAL INFRASTRUCTURE ON FINANCIAL SECTOR COMPETITION: A SCHUMPETERIAN SHIFT? . research has applied these theories to the effects of electronic banking and financial infrastructure on financial sector competition. Research Question How do electronic banking and financial. determinants of competition, panel data on 1,514 banks was gathered from the BankScope database of financial statements for 2004-2006 for a range of banks from 185 countries. Applying the Panzar and