Impact of Internet Banking on the Global Economy

Abstract

The main purpose of this study was to explore the impacts of Internet banking on the global economy. The importance of this study is twofold. First, the study enhances the literature that focuses on the economic impact of Internet banking since research on the topic is limited. Second, the findings of the research provide a conceptual framework for understanding the role Internet banking plays in the global economy. The study used a qualitative literature-based research methodology, which drew upon the review of literature relating to the impact of online banking on the global economy. The study has identified three major impacts of the Internet on the global economy, which include direct impacts, dynamic and indirect impacts of the Internet. The direct impacts relate to the Internet’s contribution to the GDP of countries through Internet-based activities.

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The dynamic economic impacts of the Internet relate to the net growth of the GDP on all activities supported by the Internet and those attributed to the Internet. Studies using the dynamic impacts of the Internet have shown that Internet development contributes to economic growth. Indirect impacts that the Internet has on the economy relate to its effect on social welfare gains and consumer surplus that are not captured in GDP-related measures. This study also highlighted three ways through which Internet-banking affects the global economy by facilitating the cross border transfer of funds, which include facilitating e-commerce, expanding digital cash, and international remittances. The implications of this study are twofold. First, significant investments in the Internet infrastructure can contribute to economic development. Second, there is a need for developing regulations to avert potential crises associated with expanding digital cash attributed to online banking.

Background

Ever since the registration of the first web domain name in 1985, the growth of the Internet has been increasing at an exponential rate. The Internet has weathered a number of recessions including the near-collapse of the global financial system in 2007/2008; however, its impact, reach, size and use have increased consistently (Aldás-Manzano et al., 2009). The Internet has been entrenched in the daily lives of society to an extent that it is no longer perceived as something special or novel. Indeed, the Internet has developed into an indispensable tool. It is projected that by 2016 the number of Internet users will reach three billion globally, which is nearly 50 percent of the global population

In addition, it has also been projected that by 2016 the Internet economy among the G20 member nations will reach about $ 4.2 trillion (OECD, 2013). If the Internet economy were to be considered a national economy, it would rank fourth, ahead of Europe's premier economic power Germany (Dean et al., 2012). Within the G-20 members, the Internet economy contributed $ 2.3 trillion (4.1% of Gross Domestic Product – GDP) in 2010, which surpassed the economies of Brazil and Italy. In addition, the Internet contributes about 8% of GDP in a number of economies resulting in job creation and economic growth (Dean et al., 2012).

According to OECD (2013), the pace and magnitude of this change are constantly accelerating together with the nature of the Internet; that is, the people using it, how it is used and for what purposes, which is also changing fast. Among the developing countries that make up the G20, there are about 800 million Internet users, which exceeds the number of users in G-20 major economies. Currently, governments, businesses, and industries cannot ignore the impact and scale of the Internet. Just like other technological advancements, the Internet comes with several opportunities through which consumers are often excited and swift to grasp. The banking industry, one of the growth engines for the economy, has been transformed by the advent of the Internet (Aldás-Manzano et al., 2009).

Banks are expected to go through continuous digital transformations in the future with customers increasingly favoring the use of digital avenues (mobile and Internet) in interacting with their respective banks. During recent decades, banking institutions have exploited the Internet to target a wide customer base at relatively lower costs (Ahmed, Zairi & Alwabel, 2006). This has entailed (Ahmed, Zairi & Alwabel, 2006) offering basic banking services such as fund transfers and verifying account status via the Internet. Moreover, banks have also expanded the scope of their services to encourage banking through mobile and Internet channels while at the same time enhancing their distribution mix. In this respect, The Organization for Economic Co-operation and Development (2013) projected that these efforts are likely to revolutionize the strategies adopted by banks in targeting customers.

In 2010, it was reported that 60 percent of bank customers had never utilized mobile or online banking; nevertheless, this number had fallen to about 37 percent by 2014, which is an indicator that customers are shifting towards mobile and Internet channels for conducting daily transactions (Dean et al., 2012). Regardless of the fact that the prominence of online banking is likely to increase, branches will still be a crucial part of banking operations. However, it will be imperative for banks to adapt their branch networks in accordance with the needs and preferences of customers in every location. Such changes have been projected to help banks in renovating their distribution, boost sales, and lessen operational costs by about 30-50% (OECD, 2013).

The patterns of use for conventional banking is changing, which is mainly attributed to technological advancements, innovative service offerings other businesses spurring online business, and altered customer preferences (Arvanitis & Loukis, 2009). As a result, banking institutions across the world are renovating their branch networks with an emphasis being placed on advisory services as well as sales. Banks are using social banking applications and e-commerce portals to enhance the customer experience by providing them with several banking options that are relatively easy to use. According to Baily (2002), digital delivery platforms for banking services are anticipated to increase rapidly, resulting in complex processes. As a result, banks will have the challenge of integrating back end systems in order to ensure that customers have a smooth experience when using the various banking channels (Auta, 2010).

There are three levels of online banking, which includes basic information online-banking, simple transactional online banking, and advanced transactional online banking. The basic information online banking involves the use of websites in the dissemination of information relating to services and products provided by banks (Baily, 2002). Simple transactional online-banking comprise of sites that enable customers to make inquiries on the status of their accounts, issue instructions to their banks and apply for various services; however, account transfers are not among the features. Advanced transactional online banking allows electronic funds transfer. E-banks plays a crucial role in the modern e-economy (Ho & Wu, 2009). Given the growth of the Internet economy and the crucial role that online-banking plays in the growth of the Internet economy, this thesis focuses on the impacts of online banking on the global economy.

Research Gap

A strong banking sector is crucial for the growth of the global economy and has a profound impact with respect to fostering economic development. Globally, the banking sector must change in order to keep pace with increasing globalization. This change focuses primarily on the shift from the conventional distribution of banking services to electronic delivery of baking services. The overall impact of the Internet on the global economy has been emphasized in the literature related to the economic impacts of e-commerce and online retail´┐╝ (Rangan, Adner, & Strategy, 2012; Xue, Hitt, & Chen, 2011). The importance of (Rangan, Adner, & Strategy, 2012; Xue, Hitt, & Chen, 2011) banks in the global economy was underscored by the recent global financial crisis of 2007/2008, which was attributed to the failure of banks (Baily, 2002).

However, there is scant knowledge that synthesizes the contribution of Internet banking on the global economy. As a result, given the increase in the use of Internet banking, it is imperative to explore how this revolutionary approach to banking affects the global economy (Bapna, Jank, & Shmueli, 2008). Therefore, this study addresses the identified gap in the literature in order to have an understanding of online-banking affects the global economy. With the growth of the Internet economy, what role does Internet banking play, and in what ways will Internet banking influence the global economy in the future?

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Research Question

The main objective of this research is to explore the impacts of online banking on the international economy. Specifically, this thesis sought to explore the role of Internet banking in the growing Internet economy and the ways through which Internet banking will influence the global economy in the future. In order to achieve these objectives, the following research question was used to guide the research.

What Is the Impact of Internet Banking on the Global Economy?

Importance of the Study

The importance of this study is twofold. First, the study enhances the literature that focuses on the economic impact of Internet banking since research on the topic is limited. Second, the findings of the research provide a conceptual framework for understanding the role that Internet banking plays in the global economy. In order to understand the impact of Internet banking on the global economy, it is crucial to understand how Internet banking contributes to national economies. As a result, the findings presented in this study can be used to inform policies adopted by countries regarding the use of Internet banking in spurring economic growth and development.

Thesis Structure

This thesis comprises of five sections – introduction, methodology, literature review, results and analysis, and conclusion. This chapter has provided background to the study, the research gap being addressed by the current study and the importance of the study. The methodology section provides a description of the steps undertaken in performing the study including the research methods used, the research design adopted data collection methods and the data analysis strategies. The literature review section provides a systematic review of existing literature relating to the topic. The results and analysis section presents and analyzes the secondary data collected during the research. The conclusion section summarizes the contributions of this research including areas of future research.

Research Method

The research method is an important aspect of research methodology that should be taken into account when performing any form of research inquiry. In this respect, the qualitative research method was adopted for the current study, and this involved gathering qualitative data and analyzing and reflecting on the themes present in the data (Creswell, 2013; Saunders, Lewis, & Thornhill, 2007). The qualitative research method is characterized by a critical analysis of texts instead of making use of statistical inferences and findings in presenting the results of the study, which is the case with empirical quantitative studies. In the current study, quantitative research methods were considered inappropriate due to the exploratory nature of the present study. Moreover, the study had the objective of producing and presenting information regarding the topic of interest, which related to the impact of Internet banking on the global economy, followed by making informed assertions regarding the role of Internet banking in the global economy.

Moreover, the study used a critical approach, which posed the need to utilize qualitative research methods. Kothari (2008) pointed out that exploratory studies are ideal in situations typified by undefined and unstructured research problems, which is the case with the current research since there are no predetermined sets of variables that were explored including the relationships between the variables. Essentially, there was no means of quantifying the phenomenon under study; as a result, qualitative research methods were considered the best approach in handling the research question.

Exploratory studies have the main aim of investigating what is taking place by asking questions, discovering new insights, and assessing the phenomenon of interest using new perspectives. It is also imperative for exploratory studies to be sufficiently flexible in order to ensure that potential changes in the direction of the study are considered in the event that new data emerges that compels the researcher to modify the research direction (Kumar, 2005; Miranda, Cortes & Barriuso, 2006). However, the lack of rigidity does not imply that exploratory studies do not have the direction that guides the research process. In this respect, this study used an open-ended research question to guide the qualitative research process.

 

This study used the literature-based research methodology, which involves using existing literature as the population for the study. The literature-based research methodology involves a critical analysis of the concepts, theories, and other research bodies relating to the topic under investigation. According to Maxwell (2005), the literature-based research methodology is usually used in summarizing literature in order to gain a comprehensive understanding of the issue being studied. The literature-based research method was executed by reading through, analyzing, and sorting literature with the main aim of identifying the crucial attribute of the materials incorporated in the research. This method is considerably different from other research methodologies since it is indirectly related to the object under investigation, that is, it is a non-contact research method. Literature materials are considered a pool of crucial knowledge.

Two types of literature-based methodology can be adopted. This includes the systematic literature review (also known as the systematic overview) and the traditional literature review (also known as the narrative or comprehensive review) (McBurney & White, 2009; Panneerselvam, 2004). This thesis used the traditional literature review, which entails searching data, critically analyzing the collected data, and summarizing the themes present the collected data. In other words, this approach involved the comprehensive reading of past literature covering the issue being investigated. As McNeill (2005) explains, traditional literature reviews seek to provide a comprehensive summary of the current literature pertaining to the research issue being studied. The following subsection provides a detailed description of the steps undertaken to collect data for this research.

Data Collection and Analysis

The literature-based research method used in this research drew upon the review of literature relating the impact of online banking on the global economy, found in electronic databases as well as citation indexes such as Ebscohost, SpringerLink, Science Direct, Oxford Journals, EconLit, Google Scholar, Informit, IngentaConnect, JournalSeek, Pubget, Science.gov, ScienceDirect, WorldCat, JSTOR, Questia and Emerald. The literature-based research methodology was used since it yields less biased results when the selection criteria are based on well-developed criteria that help in preventing the omission of important results. In addition, literature-based research requires the use of appraising procedures that comprise the explicit exclusion and inclusion criteria. In addition, literature-based research is relatively easy to execute since it is library-based.

The current study used secondary data with existing literature being the population – sources of data. Given that existing literature can contain vast information, a sampling strategy is required to select the pertinent literature sources. Creswell (2013) suggested a number of principles to guide the literature sampling process, which includes purpose, authority, effectiveness, and reliability. With respect to purpose, it is imperative for literature sources to be valuable and pertinent to the topic under investigation. The authority of the literature source is concerned with the reputation and representativeness of the author. This can be confirmed by cross-checking whether the authors are recognized in academia and have published articles peer-reviewed journals. The authority of the source was also verified by examining the number of times a source has been cited.

Effectiveness of a literature source is concerned with the value of the source to the study such as obtaining arguments from the source and helping in the development of research thoughts. The authority of the literature sources was affirmed by checking their accuracy, comprehensiveness, and making sure that they are not outdated. Only highly effective sources were incorporated into the review because they are representative and increase the possibility of reporting true conclusions. Reliability is concerned with the authenticity of the source as well as the reliability of the information found in the literature. According to Kumar (2005), it is important for researchers to establish whether the literature sources are modified, fake or authentic. After establishing that they are authentic, literature sources have to contain reliable information. The literature sources collected were sorted and analyzed in order to facilitate critical analysis and summarizing of the sources.

The search strategy involved conducting a search on the aforementioned electronic databases and citation indices. Locating pertinent information was facilitated by the use of search terms such as “online banking,” “e-banking,” “Internet-banking,” “impact of online banking in the global economy,” “online banking and the Internet economy,” and “the economy," among others. The electronic search yielded more than 100 papers relating to the topic of interest. Out of these, 40 satisfied the criteria above (purpose, effectiveness, reliability, and authenticity). A complimentary Internet search was conducted to yield additional papers including published theses, conference papers, concept papers, and reports, leading to an additional 10 papers that met the criteria for review. Analysis of data was performed using the non-structured qualitative analysis technique. This was performed by sorting the literature, comparing and summarizing identified sources. This helps in forming a comprehensive understanding of the issue under investigation.

Literature Review

This chapter presents a review of the literature collected in the course of the research process. The findings of the literature review are arranged thematically. The chapter begins with a broad view of the topic under investigation after which it narrows into the focus of the review. To this end, the chapter commences with an overview of the impact of the Internet on the global economy after which it focuses on the impact of Internet banking on the international economy.

Impact of the Internet on the Global Economy

Before delving into the specific impacts of Internet banking on the global economy, it is crucial to explore the impact of the Internet on the economy. The Internet has a profound impact on contemporary society. With respect to this, the Internet enables the world to be interconnected and has significant effects on culture, economy, and society. The Internet originally began as a communication tool (Bertschek, Cerquera, & Klein, 2013). However, it has evolved into an omnipresent technology that supports all economic sectors. In fact, the Internet is considered a critical infrastructure just like transportation networks and water.

In order to emphasize the crucial economic role played by the Internet, the phase Internet economy is a frequently used term. The economic impact associated with the Internet is enormous and still growing (Dean et al., 2012). This trend can be attributed to the high penetration of the Internet, the high levels of usage of credit cards, a retail market is extremely competitive, and efficient Internet infrastructure. When measuring the economic impacts associated with the Internet, three approaches are used. These include determining the direct, dynamic, and indirect impact (OECD, 2013).

Direct impacts. The direct impact is considered the most conservative approach and draws primarily on official reported data. Under this approach, the emphasis is placed on expressing the Internet economy as a component of the GDP (Dean et al., 2012). As a result, studies that use this approach explore the economic sectors closely associated with the Internet, after which they are aggregated and the findings interpreted and reported as a measure of the Internet economy owing to the fact that this approach captures the impacts that can be distinguished from other economic sectors. The direct approach incorporates the value-added generated by activities that are Internet-based such as electronic commerce and those that support the Internet such as Internet Service Providers (Brynjolfsson & Saunders, 2010; Crandall, Lehr, & Litan, 2007). This approach excludes the benefits that are not related to GDP.

Studies have examined the size of activities related to the Internet as a fraction of the GDP for developed countries. Hamilton Consultants (2009) analyzed the contribution of the Internet economy to GDP by using Internet-related jobs and concluded that the Internet economy contributed 2% to the US GDP in 2008. Based on a 2010 report on the economy of the United Kingdom, the Internet contributed more to the GDP than the contribution of the education and construction sectors. In the US, the contribution of the Internet to the country’s GDP surpasses the federal government’s GDP percentage (Hamilton Consultants, 2009). The Internet economy, also known as e-economy, cyber economy, or the digital economy is ranked among the top six sectors in South Korea and China. The GDP economic growth rates of 5-10% reported in India and China regardless of the turmoil in the global economic environment can be attributed to the Internet economy (Greenstein & McDevitt, 2011).

In the developed economies, it is estimated that the Internet economy of G-20 nations will report an annual growth rate of about 8% in the next 5 years, which far exceeds all other traditional economic sectors while at the same time creating jobs and wealth. In 2016, it is projected that the Internet economy will constitute 5.7% of the European Union GDP and 5.3% of the GDP of the G-20 nations. For the case of developing nations, the annual growth rate of the Internet economy is estimated to be 18%. This can be attributed to the vast investments in broadband infrastructure in these countries.

In general, it has been estimated that during the period 2010-2016, the Internet economy in the G-20 nations is likely to double and create additional employment for 32 million individuals (Dean et al., 2012). The growth of the Internet economy has been associated with the increase in Internet users and access to faster Internet. The number of Internet users is poised to increase from 1.9 billion reported in 2010 to about 3 billion by 2016. In addition, the widening Internet access especially through the increased proliferation of mobile devices together with social media popularity is magnifying the impact of the Internet on the economy (OECD, 2013).

Dynamic impacts. The dynamic approach to measuring the economic impact associated with the Internet places emphasis on the net growth of GDP attributed to all Internet-related activities. This approach is also considered conservative since it makes use of officially reported statistics (Brynjolfsson & Saunders, 2010). The dynamic economic impacts associated with the Internet is determined by examining the statistical association between the economic aspects such as the employment and growth of GDP, and measures associated with Internet development. The focus of this approach is to examine the net and the aggregated effect of the Internet on a country’s GDP (Crandall, Lehr, & Litan, 2007). Studies using the dynamic approach to evaluate the economic impact associated with the Internet consider all the industries that generate value attributed to the Internet and the net economic impact that the Internet has on a country’s GDP (Czernich, Falck, Kretschmer, & Woessmann, 2011).

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The use of the Internet has a significant impact on the performance of an industry at the numerous phases of organizations’ activity. For instance, the Internet plays a crucial role in enhancing cross-organizational collaboration as well as research and development efficiency. Numerous empirical studies have affirmed the positive impact of the Internet on research and development collaboration and research efficiency; thus, the Internet has a positive influence on the innovation activity of an organization (Dedrick, Gurbaxani, & Kraemer, 2003; Dutz, Orszag, & Willig, 2009). The economic impact of the Internet is also evident in other phases of an organization’s economic activity including facilitating interaction between market players and enhancing the flow of information, which in turn increases firm-level productivity.

The Internet also increases the intensity of information flows (Forman & Zeebroeck, 2012), results in improved matching processes, and subsequently contributes to enhanced productivity (Dedrick, Gurbaxani, & Kraemer, 2003; Franklin, Stam, & Clayton, 2009). Various empirical studies have affirmed the positive effect that the Internet has on the efficiency of firms including Brynjolfsson and Saunders (2010), Baily (2002), and Greenstein & McDevitt (2011). It is evident that these benefits attributed to the Internet in various sectors lead to increased productivity and savings. Varian, Litan, Elder, & Shutter (2002), who examined the effect of Internet-related technologies on the economic activity of firms, conducted one of the earliest studies to investigate the impact that the Internet had on the profitability of organizations.

The study surveyed firms drawn from various sectors. The findings show that during the early phases of the growth of the Internet, most firms searched for Internet-related solutions, which helped them in increasing revenues as well as cutting costs. The authors reported that, in Germany, France, UK, and the US, the Internet resulted in cumulative cost savings of about $163.5 billion (Varian, Litan, Elder, & Shutter, 2002).

From an economic perspective, the efficiency gains attributed to the Internet in all sectors resulted in industries reporting higher added value. The added value attributed to the Internet has a specific meaning with respect to the Internet economy (Rangan, Adner, & Strategy, 2012). From a first viewpoint, the added value is generated because of the Internet; as a result, it can be considered to part of the total Internet economy. From another angle, the generated value-added does not support the Internet, or not solely based on the Internet; thus, it is unlikely to be captured by studies that choose particular activities in current sectors as Internet-related to be evaluated – an example is e-commerce (Koutroumpis, 2009).

The mechanism of the dynamic Internet economy, which is comprised of three stages. The first stage denotes the growth of Internet infrastructure, which refers to the sectors that support the Internet.

  1. The first stage is found at the bottom row of the illustration and is comprised of firms building, installing, or managing the Internet infrastructure.
  2. The second stage comprises firms using the Internet infrastructure to offer new services such as content firms, web-hosting companies, and search companies among others (OECD, 2013). Other activities included in the second stage are comprised of a wide range of e-commerce businesses such as Internet-banking and online shopping. According to OECD (2013), these Internet-specific services contribute to a country’s GDP and form the platform for the third stage.
  3. The third stage is characterized by the impact of the Internet spreading almost all activities in all economic sectors. Most of these advantages are reported in sectors that are outside the conventional Internet sector such as government, agriculture, and automotive sectors.

It is imperative to note that the benefits reported by firms in the third stage depend significantly on the infrastructure of the first level and the services offered in the second level (OECD, 2013). As a result, the effects of dynamic dependence can be witnessed at the macroeconomic scale in the form of a higher economic growth rate.

Another aspect associated with the dynamic impacts of the Internet on the economy relates to the evaluation of the net impact that the Internet has on the economy. As pointed out earlier, Internet introduction often leads to the displacement of economic activities, especially from offline to online environments (Arvanitis & Loukis, 2009). An example is the displacement of traditional physical banking characterized by physically visiting the branch to online banking that takes place in a virtual world. Another example is the retail sector whereby the Internet created a new online-based retailing environment. The underlying observation is that, when online distribution channels are introduced in any industry, there is a paralleled reduction in terms of the significance of the conventional offline channels (Crandall, Lehr, & Litan, 2007).

The dynamic approach to the impacts of the Internet considers the net change; that is, the net surplus with respect to the economic benefits attributed to the Internet. In other words, not only does the Internet have an effect on the sector supporting or the Internet or those primarily operating the Internet, but it also has a clear effect on diverse activities of all sectors. In addition, the transformational impacts associated with the Internet within the firm might also imply a change in the GDP structure. This means that the total net effect of the Internet ought to be lower than the aggregated value of all the generated benefits attributed to the Internet.

Some studies have examined the net economic effects associated with the Internet and information and communication technology (ICTs) as well as the macroeconomic role that the Internet plays. Apart from the role that ICT plays in improving productivity, it is imperative to note that ICT is becoming an integral aspect of the daily lives of society including the economic domain. Several studies have documented the economic impacts associated with ICT (Brynjolfsson & Saunders, 2010). Whereas this plays a role in understanding the relationship between ICT, and economic growth, efficiency, and production, the vast number of these studies also results in confusion due to the use of different methodologies, different ICT aspects, and different aggregation levels. In addition, these studies have reported inconsistent findings.

In a meta-analysis conducted by Stiroh (2004) aimed at summarizing the effects that ICT has on economic output and productivity using econometric estimation, it is found that including fixed impacts (first stage) results in lower ICT elasticity whereas using more aggregation has the opposite effect. Another meta-analysis by Polder, van Leeuwen, Mohnen, & Raymon (2009) involving 150 empirical studies concluded that there no robust results suggesting a relationship between economic productivity and ICT in the course of the 1980s and during the early 1990s. The authors also concluded that it was impossible to determine this relationship because of a lack of accurate data and insufficient analytical techniques (Polder, van Leeuwen, Mohnen, & Raymon, 2009). By contrast, Melville, Kraemer, & Gurbaxani (2004) reported that investments in IT generate value; however, the effect of IT expenditure depends on a number of factors including the overall macroeconomic environment, the competitive environment, and the number of complementary resources.

Moreover, synergies between human and technical IT resources only offer a competitive advantage in the short-term. Holt and Jamison (2009) conducted a survey to explore the contributions of broadband to economic growth and reported an overall positive impact of broadband on economic growth. Nevertheless, the authors note that the quantitative effect of broadband could not be determined with accuracy (Holt & Jamison, 2009).

A number of studies have also explored the dynamic impacts associated with the Internet. For instance, Crandall, Lehr, and Litan (2007) explored the relationship between Internet penetration, and employment and economic output in the United States. In order to study the macroeconomic effects associated with the Internet, the authors used an ordinary least squares regression analysis with Internet penetration measured using the number of broadband lines per capita. Economic output and employment rates in 2005 were the dependent variables. According to the findings of the study, there is a positive correlation between employment and broadband use. Specifically, the study found that for each 1 percent increase in Internet penetration in each state, employment increased by about 0.2-0.3 percent annually. Another research conducted by Franklin, Stam, and Clayton (2009) using broadband data from European countries revealed a positive correlation between broadband use and firm productivity.

In addition, a firm-level analysis performed by the authors revealed that, in the Netherlands and Sweden, ICT facilitates innovation resulting in greater productivity. In another study, Qiang, Rossotto, and Kimura, (2009), a positive correlation was reported between the economic growth rate and broadband adoption. The study used a cross-country empirical model in analyzing this relationship with data from 120 developed and developing nations. The authors reported that for every increase in Internet penetration by 10 percent, an annual economic growth rate of 1.21 % was reported (Qiang, Rossotto, & Kimura, 2009). However, the correlation does not necessarily suggest causation. Indeed, numerous empirical studies have identified economic growth as one of the primary determinants of broadband development.

These conclusions suggest that mutual dependency existing between economic growth and broadband development. Specifically, developed countries have more investments in the development of the Internet; nevertheless, a more developed Internet infrastructure can result in a higher rate of economic growth. A number of studies have attempted to tackle the issue of whether the Internet is a driver of economic growth by using econometric methods such as Koutroumpis (2009) and Czernich, Falck, Kretschmer, & Woessmann (2011). The findings of these studies are consistent and reveal that the development of broadband can have a causal impact on economic growth. Czernich, Falck, Kretschmer, & Woessmann (2011) explored the impact that Internet infrastructure has on the economic growth using a panel data of Organization of Economic Cooperation and Development (OECD). Internet development was measured using broadband penetration rates.

The findings of their study showed that an increase in Internet penetration by about 10% results in an increase in annual economic growth per capita by about 0.9-1.5%. Koutroumpis (2009) used broadband penetration rates in order to determine the impact of the Internet on economic growth. The results of this study showed that increasing returns to Internet investments resulted in persistent network externalities. Based on the meta-analysis conducted by Holt and Jamison (2009), it can be concluded that the Internet has indeed had an overall positive effect, although measuring this quantitative impact accurately is impossible. Moreover, the OECD (2013) stresses that assessing the macroeconomic impact associated with the Internet a relatively large and consistent dataset in order to yield robust and solid econometric results.

Indirect impacts. The indirect impact approach to measuring the economic impacts of the Internet involves exploring economic concepts such as social welfare gains and consumer surplus. Several types of transactions occur over the Internet in the framework of non-market and market environments (Arvanitis & Loukis, 2009). Market interactions refer to the transactions occurring between sellers and buyers of a particular product/service and typified by the market-clearing and price-clearing mechanism. These transactions are often captured by the conventional measures used to assess economic activity; thus, they are captured using the first two approaches (Brynjolfsson & Saunders, 2010).

Whereas market transactions over the Internet have far-reaching impacts, the effects of the Internet on non-market transactions are somewhat more profound. These non-market interactions including their respective effects contribute to societal wellbeing as well as individual utility; however, the traditional economic measures fail to capture these contributions. The approach of using indirect impacts associated with the Internet is based on the presumption that the impact of the Internet exceeds what is measured using current statistics.

In this regard, the two categories of the impact of the Internet can be differentiated include the positive effect of the Internet on consumer surplus as well as the wider welfare gains attributed to the Internet such as those associated with the formation of social capital and the effect on the environment among others. Most of these effects are described in the contemporary economic framework and can be quantified in particular circumstances (Bapna, Jank, & Shmueli, 2008). However, it is imperative to point out that this quantification is extremely challenging since it requires vast amounts of data as well as strong assumptions.

A number of studies have provided empirical evidence regarding the measurable positive effects that the Internet has on consumer surplus including Morton (2006), Greenstein, and McDevitt (2011). These empirical studies place an emphasis on the economic benefits to the consumer attributed to affordability accessibility to the Internet, which is also related to the consumer surplus attributed to the utilization of products/services from sectors that produce for the Internet. Some studies have focused on the economic impact that the Internet has on consumers and have explored its effects on wellbeing and individual utility (Morton, 2006).

It has been found that social networking websites like Facebook, Instagram, and Twitter play a crucial role in the formation of social capital, which can subsequently enhance individual perceptions regarding social wellbeing. Nevertheless, it is extremely challenging to quantify these findings. This can be attributed to the fact that some effects cannot be measured economically and presented using economic value such as the satisfaction that people accrue following the use of services offered via the Internet (Bapna, Jank, & Shmueli, 2008).

Besides the impacts that the Internet has on consumer surplus, its impacts span the wider society such as social capital, health, scientific research, education, and environment. Owing to the fact that these phenomena cannot be operationalized and that datasets for them are inexistent, it is impossible to quantify the aggregated impact of the Internet on these domains. This also implies that the majority of these impacts and how they contribute to GDP cannot be measured using the direct and dynamic approaches discussed above (Greenstein & McDevitt, 2011).

One of the sectors that have benefited significantly from the Internet is the environment. This wide impact is manifested in the phrase Green ICT, which is comprised of numerous solutions such as smart cities and smart buildings among others. The electricity industry is an ideal example of how Internet connectivity has affected both firm efficiency and the environment. In this regard, the Internet is used as a communication platform for the smart electrical grids, whereby the Internet is used in eliminating the information gap that exists between consumers and producers (Czernich, Falck, Kretschmer, & Woessmann, 2011). The Internet has also had a profound impact on the education sector. Remote education occurring over television and radio has facilitated the development and growth of education services, which cannot be captured by the direct and dynamic impacts of the Internet for a number of reasons.

  1. First, despite the fact that the social impacts associated with education are precise, the macroeconomic effect of education on GDP remains a controversial issue.
  2. Second, although the effect of education can be detected, this is only possible in the long-term.
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Besides education, scientific research has also benefitted significantly from the Internet. In this respect, the Internet has helped in enhancing information access as well as improved communication between research centers as researchers. Common examples include facilitating access to digital content including databases and articles over the Internet such as Science Direct and JSTO among others. These benefits are not captured using GDP measures (Bapna, Jank, & Shmueli, 2008).

The healthcare industry is yet another industry that has benefited significantly from the Internet. In this respect, Internet technologies have been utilized in cutting increasing healthcare costs. For instance, the Internet has been employed to lessen the number of visits made by physicians for home patients. Presently, the fraction of healthcare expenditure relative to the GDP of various countries is increasing, with healthcare expenditures of OECD countries averaging 8.8 percent (Greenstein & McDevitt, 2011). E-health is an ideal example of an Internet solution that has been used in addressing the issue of increasing costs of healthcare. E-health comprises diverse Internet-enabled services and solutions aimed at enhancing the efficiency of healthcare, information access, and providing ways of improving healthcare such as facilitating access to medical knowledge and sharing patient information. E-health has the potential to reduce healthcare costs while at the same time increasing efficiency (Brynjolfsson & Saunders, 2010).

The government sector has also reported considerable benefits associated with the Internet, especially through e-government services. E-government involves Internet-facilitated interaction between citizens and their governments. This has helped in contributing to public sector effectiveness and efficiency and has increased the convenience, efficiency, and accessibility of public services by facilitating instant communication and eliminating the need for the physical presence of government agencies. Improved communication with the government can contribute to transparency, enhance democracy, and reduce corruption. Despite the fact that these benefits are clear, they are not directly related to GDP since the efficiency of government agencies, increased accessibility and openness are not directly translate to measured benefits associated with the Internet (Koutroumpis, 2009; Stiroh, 2004). After reviewing the broad impacts of the economy, the following section reviews the specific impacts that Internet-banking has on the economy.

Internet-banking and the Global Economy

Internet-banking can be classified under the second stage of dynamic economic impacts associated with the Internet, which comprises firms using the Internet infrastructure in offering new services (Shaikh, 2005). Therefore, it is imperative to note that Internet-banking does not directly affect the global economy; however, it supports services having a direct impact on the international economy. A review of existing literature performed in this study revealed three ways through which the Internet will impact the global economy, which include facilitating Internet commerce (e-commerce), facilitating international funds transfer through digital cash, and international remittances (Salehi & Alipour, 2010).

It is imperative to note that, in the identified impacts, Internet banking forms one of the common methods of payment, which underscores the significant role that the Internet will play in the global economy. In addition, e-commerce, digital cash, and international remittances have significant impacts on the international economy (Hernández-Murillo, Llobet, & Fuentes, 2010).

Facilitating Internet Commerce – E-Commerce

Internet banking plays a crucial role in the e-commerce system by providing a method of electronic payment method for online transactions. According to Kshetri (2007), the popularity of e-commerce payment systems is increasing because of the increase in the adoption of Internet-based banking and shopping. Credit cards are among the most prevalent means of payment in online transactions. With many companies adopting e-commerce business models as a method of international expansion, enhancing customer service, improving productivity and cutting costs, Internet-banking is poised to play a crucial role in facilitating the expansion of e-commerce as well as the expansion of businesses into international markets (Kshetri, 2007).

However, with the increasing popularity of e-commerce, banks commenced utilizing the Internet for supplementary purposes including the delivery of conventional products to businesses and customers. In addition, banks are also developing products exclusively for e-commerce purposes. For instance, several banks have developed transactional websites to enable businesses and individuals to access essential banking services including credit card applications, funds transfer, and verifying balances among others. In order to have an understanding of the role that banks play in e-commerce, the following subsection presents a discussion of the e-commerce products related to Internet-banking (Lin & Jou, 2005).

E-commerce products. Banking institutions across the globe are developing a myriad of e-commerce products that have been successful. These products act as facilitators of e-commerce. As a result, online banking has been identified as a crucial facilitator of e-commerce, especially following the decline in their long-established function as financial intermediaries. One of the e-commerce products developed by banks is Internet portals (Rehman, 2012). Banks are increasingly participating in special Internet portals, which refer to websites where several sellers display their products/services for buyers visiting the website. In these sites, banks provide a means of payment through which customers can pay for the products they purchase on the Internet. Banks are also taking measures to protect clients who participate in e-commerce transactions from fraud associated with identity misrepresentation. This involves the use of encryption technology to verify the identity of account holders and act as an intermediary through which the holders of the account can verify their identities (Ho & Wu, 2009).

This helps in ensuring the safety of e-commerce transactions. In addition, banks are also providing assistance for business entities in e-commerce. Electronic billing is another product through which Internet banking facilitates e-commerce. With respect to this, banks are combining the e-mail feature of the Internet with their capacity to perform electronic processing of payments using interbank-networks. In addition, banks are facilitating e-commerce through electronic checks and electronic money. In this respect, banks are developing smart cards containing funds that can be used to purchase items and services electronically. Lastly, banks are facilitating e-commerce by integrating their automatic teller machines with Internet networks. In order to explore the impact of Internet-banking on the global economy, it is imperative to examine how the impact of e-commerce (facilitated primarily by Internet-banking) on the global economy, which is covered in the following subsection (Aldás-Manzano et al., 2009).

Economic impacts associated with e-commerce. Business-to-business e-commerce is comprised of a significant portion of e-commerce transactions and plays a pivotal role in the international supply chain networks. The increase in business-to-business commerce has had significant impacts on the profitability and costs of companies globally. From a microeconomic perspective, an increase in business-to-business e-commerce leads to cost savings for global and domestic sourcing, enhanced supply chain management, and reduced transaction costs. From a macroeconomic point of view, the increase in business-to-business commerce helps in reducing inflationary pressure, enhances competitiveness, profitability, and productivity (Auta, 2010).

E-commerce has resulted in significant changes in the retail market. For instance, businesses no longer need a physical presence to access markets. In addition, e-commerce has enabled businesses to expand to global markets with relative ease. Aura (2010) considers the impact of e-commerce on the global economy to be enormous to such a degree that businesses can reach their target global markets without spending economic resources. In addition, Ho and Wu (2009) point out that the effect of electronic commerce on the international economy has an effect on nearly every aspect ranging from production to distribution. E-commerce has heightened the challenges that businesses face in order to stay ahead of the competition. Moreover, e-commerce has enabled countries that are economically weak to play a forefront role in global commerce and trade. This can be attributed to the fact that e-commerce eliminates all the barriers (political and economic), which has resulted in more effective marketing methods capable of penetrating barriers associated with international trade (Auta, 2010; Wu, Hsia & Heng, 2006).

International Funds Transfer (Digital Cash)

Internet-banking contributes significantly to the amount of digital cash in the global economy, which has significant economic consequences. The most important consequence associated with digital cash is its use in the international sphere. Internet-banking enables people to make purchases over the Internet, which has no geographical limits. Digital cash contributes to the efficiency of the international economy through efficient international transactions. For instance, in Japan, international funds transfer commission ranges from $20-30 whereas domestic transfers range from $2-3; thus, the cost reduction is more significant for the case of global payments (Trautman, 2014).

The impact of digital cash on the international economy, which is comprised of three phases. The first phase is the expansion stage. Internet-banking will result in an increase in the amount of digital cash (Plassaras, 2013). The resulting higher efficiency will result in unanticipated benefits for both consumers and producers. This will further result in multinational businesses gaining momentum and lead to the emergence of virtual organizations. In addition, consumers will enjoy buying goods/services using e-banks portals from across the globe. Banks relying on the conventional transactional systems are likely to report reduced competitiveness. It has been estimated that the size of the Internet economy, measured using the sales taking place over the Internet, will grow rapidly when compared to the real economy. Provided that the cyberspace economy remains smaller than the real economy, its impacts on money supply and exchange rates are likely to be limited (Swartz, 2014).

Therefore, the primary problem at this phase will be money laundering and taxation issues. These two issues require a global system of rules like an international rule of taxation for transactions taking place on the Internet, or an international treaty regarding criminal-related cyberspace investigations. The development of such rules is likely to be met with a harsh response from non-state actors. Despite these rules, the amount of digital cash will increase (Owen, 2015). The second phase is characterized by confusion. In this phase, the amount of digital cash will increase the size of the Internet economy to an extent where it is able to have an impact on the real global economy. This stage has already been reached. This will be followed by a destabilizing impact on the global money supply as well as the impact on the exchange rate. This raises concerns regarding the likelihood of a financial crisis. Despite the significant role of the cyber economy in the real global economy, it is relatively difficult to implement reforms to avert a potential financial crisis (Varriale, 2013).

This challenge can be attributed to the free and transnational nature of cyberspace. In addition, coming with some sort of international agreement will pose the need to conduct an international global negotiation process. The organization phase is the last phase that takes place after a financial crisis has occurred. This can be characterized by the development of a monetary authority to govern the Internet or territorial segmentation. Territorial segmentation involves banks operating on the Internet being managed by central banks in their respective countries, which will manage the flow of digital money in their jurisdictions (Varriale, 2013).

International Remittances

International remittances form the second indirect impact that Internet banking has on the global economy. Internet banking provides an avenue through which funds can be transferred between countries (Acosta, Fajnzylber & Lopez, 2007). In 2009, international remittances reached $529 billion (Gupta, Pattillo & Wagh, 2009). The flow of international remittances has been estimated to the same as the flow of foreign direct investments and twice as much as the amount received in terms of foreign aid sent to developing countries. The vast size of international remittances with respect to other external flows as well as GDP in several countries is an indicator that their macroeconomic impacts are of critically important in the international economy (Adams & Page, 2005).

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Specifically, it has been reported that a crucial beneficial feature of international remittances is they are more stable when compared to private capital flows that are characterized by volatility and counter-cynical to the economic environment of the receiving economy. International remittances are a self-insurance mechanism through which developing economies can broaden their external finance sources. An econometric analysis performed by Fajnzylber and Lopez (2008) shows that a high remittance with respect to GDP lessens the likelihood of sharp current account reversals that are triggered by a drastic decline in international reserves and a decline in external debt. In addition, this effect increases significantly when the number of remittances exceeds 3% of the GDP, which signals an improved ability to pay off liabilities.

The precise nature of the relationship between economic cycles of the receiving nation is determined by the conditions of the migrant communities and the reasons for the remittances. In cases where remittances are invested by those receiving (contrary to consumption), there is a higher probability of a pro-cyclical association between remittances and economic situations of the home nation. International remittances have an effect on the macroeconomic security of a country by improving the means through which the country can access external finance (Gupta, Pattillo & Wagh, 2009). Therefore, through Internet banking, countries can have a constant flow of foreign revenue that can enhance their creditworthiness for foreign borrowing. In some cases, international remittances can lessen a country’s dependency on aid. A case in point is Bangladesh, whereby international remittance has increased amidst reductions in official development assistance (Adams, 2006).

Results and Analysis

The review of literature has revealed important insights regarding the impacts of the Internet on the economy and specifically the impacts of Internet banking on the global economy. From the review of literature, it can be suggested that the economic impacts associated with the Internet are growing, which can be attributed to the increasing penetration of the Internet, the competitiveness of the retail market, and efficient Internet infrastructure. From the literature review, three approaches were used in identifying the economic impacts associated with the Internet, which included direct impacts, dynamic impacts, and indirect impact. The direct economic impacts of the Internet measures the Internet’s contribution to GDP associated with economic sectors that are closely related to the Internet. Emphasis is placed on the economic benefits generated by activities that are based on the Internet such as e-commerce and those supporting the Internet.

Non-GDP benefits are considered under direct economic impacts of the Internet on the economy. Studies on the direct economic impact of the economy have expressed the contribution of the Internet as a fraction of GDP for different countries such as 2% in the US, 5.3% of GDP of G-20 countries, and 7.2% in the UK among others (OECD, 2013). The direct economic impact of the Internet on the GDP of developing nations is anticipated to report an annual growth rate of 18% and 8% for developed nations in the coming five years. The dynamic economic impacts associated with the Internet focuses on the net growth of the GDP attributed to all Internet-related activities. From the review of literature, studies using the dynamic impacts of the Internet on the economy have documented the positive impact of the Internet on firm-level activities such as contributing to the efficiency of Research and Development, enhancing interaction between market players, improving the flow of information, enhancing firm-level productivity and efficiency, and savings.

Studies have also shown that the use of Internet-related technologies is positively related to profitability and that investments in Internet infrastructure are capable of generating value. Specifically, it has been reported in the review of literature that broadband penetration positively contributes to economic growth and other economic variables such as employment. For cross-country studies, it has been shown that Internet penetration contributes to the annual growth rate. Some studies have also suggested a mutual association between Internet development and economic growth.

The inference that can be made from a review of the findings reported in the literature review is that Internet development contributes to economic growth and development. Nevertheless, it is imperative to note that an accurate measurement of the positive impact associated with the Internet is impossible due to the indirect economic impacts associated with the Internet. Indirect economic impacts that the Internet has on the economy relate to its effect on social welfare gains and consumer surplus that are not captured in GDP-related measures such as social capital, health, scientific research, education, and environment among others.

The review of literature has also highlighted the impacts of Internet banking on the global economy. In this respect, Internet banking can be perceived as having dynamic and indirect impacts on the economy. Three ways are identified through which Internet-banking affects the global economy by providing a means of payment for the global transfer of funds, which include facilitating e-commerce, expanding digital cash, and international remittances. With respect to facilitating e-commerce, Internet-banking offers a method of electronic payment for online transactions. Essentially, Internet-banking has been identified as a facilitator of e-commerce, which has profound impacts on the international economy. From a microeconomic point of view, e-commerce has contributed to cost savings for both global and domestic savings, lessened transaction costs, and enhanced supply chain management.

From a macroeconomic viewpoint, e-commerce helps in lessening inflationary pressure, intensifies competitiveness, economic productivity, and profitability. In addition, e-commerce has helped to bring economically weak countries to a forefront role in global commerce and trade. This is because e-commerce eliminates the political and economic barriers that hamper international trade. Internet banking also expands the amount of digital cash, which has significant consequences for the international economy. First, an increase in digital cash will result in increased efficiency of international transactions by reducing the costs associated with international transactions. In addition, digital cash is transnational, not limited borders, resulting in broader international business opportunities while global businesses becoming increasingly dynamic.

Nevertheless, there are a number of negative effects associated with digital cash on exchange rates, money supply, and the potential of a financial crisis. An increase in the amount of digital cash contributes to unstable exchange rates. Owing to the fact that digital cash is often used as a substitute for real currency, an exchange rate must be applied and a foreign exchange market should exist on the Internet. Digital cash also has the potential of affecting the supply of real money, especially in instances where people request for real money to be changed to digital money. Essentially, an increase in the amount of digital cash implies a reduced supply of real money.

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Therefore, an increase in online bank transactions means that real cash transactions are likely to decline. Moreover, an increase in online money has the potential of fuelling a virtual financial crisis because of the unregulated nature of online transactions. A scenario of an online financial crisis can be envisioned in a scenario in which people want to convert their digital cash to real money while banks have insufficient real cash on hand because most of the money is now virtual. With respect to international remittances, studies in the review have shown that they can act as a self-insurance mechanism through countries can use to widen their outside finance sources, lessen reliance on international development aid, and increase their creditworthiness for foreign borrowing.

Conclusions

This study has highlighted important insights regarding the impacts of the Internet on the global economy as well as the impacts of the Internet on global banking. The study has identified three impacts of the Internet on the global economy, which include direct impacts, dynamic and direct impacts of the Internet. With regard to the direct impacts, it is documented in the literature that the Internet economy is enormous and still experiencing growth. These relate to the Internet’s contribution to the GDP of countries through Internet-based activities. The dynamic economic impacts of the Internet relates to the net growth of the GDP on all activities supported by the Internet and those attributed to the Internet. These impacts include the overall positive impacts of the Internet on the efficiency of research and development, improved interaction between players in the market, and productivity.

Studies using the dynamic impacts of the Internet have shown that Internet development contributes to economic growth. The indirect economic impacts that the Internet has on the economy relate to its effect on social welfare gains and consumer surplus that are not captured in GDP-related measures such as social capital, health, scientific research, education, and environment among others. This study has also highlighted three ways through which Internet-banking affects the global economy by facilitating cross border transfer of funds, which include facilitating e-commerce, expanding digital cash, and international remittances. In all these impacts, Internet-banking offers a means of payments.

Summary of Contributions

Two important contributions can be derived from the findings of this study. First, the findings show that Internet development can contribute to economic growth and development. An implication of this finding is that countries seeking to develop their economy should make significant investments in Internet infrastructure. Internet banking is one of the areas of focus that can be used to foster economic development. Second, the results of the study have highlighted potential negative consequences in the international economy because of an increase in digital cash attributed to Internet banking such as exchange instabilities, potential financial crises and effects on the money supply. This suggests the need for the development of regulations to avert such problems before they occur.

Future Research

This study has relied on the findings reported by past studies in order to determine the potential impacts that Internet banking on the global economy. The study has modeled a potential scenario of the impact of Internet banking. While this is conceptual, future studies should try quantifying the impacts in order to model and accurate scenario.

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