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DEPARTMENT OF MANAGEMENT
AFDELING FOR VIRKSOMHEDSLEDELSE
UNIVERSITY OF AARHUS C DENMARK
ISSN 1398-6228
Working Paper 2003 - 2
Patterns of Innovation in Internet Banking
Jørn Flohr Nielsen
1
Patterns of Innovation in Internet Banking
Jørn Flohr NielsenSchool of Economics and Management, University of Aarhus, Denmark
Abstract
This paper analyses the adoption and implementation of Internet banking on
the basis of theories of organizational and information system innovation. It
is one of the first studies examining innovation pattern and performance at
the firm level in the service sector. Using survey data from 278 Danish,
Finnish, Norwegian, and Swedish banks, it is shown how these banks –
some of which are among the world leaders in the use of new banking
technology – respond to the challenge of Web technologies. The different
adoption patterns of the banks are analyzed using structural equation
modeling. The results show that an early adoption of sophisticated,
integrated Internet-banking solutions is associated with market orientation,
inter-firm cooperation in joint ventures, and willingness to cannibalize older
investments. The results also indicate that attractive Web sites depend on
management support and line-crossing participation in the process of
implementation. As for performance, there is argued against simple
technological instrumentality and against the prediction that small late
adopters are outperformed by large first movers.
Keywords: Web technology, Internet banking, technology adoption, organizationalinnovation, IT management, structural equation modeling, performance.
2
Introduction
Huge investments in Internet technology, especially in the banking sector, are
considered crucial to gaining competitive advantage and even to survival as
independent organizations. These investments are expected to enable the
establishment of new forms of customer relationships and organizational functioning.
Organizations, however, are not equally fast in the adoption and implementation of
these technologies, and early adoption does not automatically lead to successful
customer relationships. Organizations have different capabilities of sense-and-
response to new technology and new market demands; more or less deliberately,
they choose different patterns of innovation.
Researchers on innovation have mainly explored patterns of innovation across
industries, with few studies investigating patterns of product and process innovation
within organizations (Damanpour and Gopalakrishnan 2001). Developments in
information technology in retail banking have been used to illustrate how innovation
in the service sector may proceed, from increases in efficiency through improve-
ments in service quality to the generation of new network service products (Barras
1990). This pattern has been called a “reverse product cycle” because it is different
from the product-before-process pattern often found in the manufacturing sector
(Abernathy and Utterback 1978; Barras 1986).
3
Apparently, the reverse product cycle may provide a viable description of the
adoption of Web technologies in the new millennium. Using banking as the vanguard
sector, however, a more complex pattern may emerge and even the distinction
between process and product may be blurred. As also recognized by Barras (1990),
innovation operates as an interactive process; when we try to understand how
individual organizations respond to new technological developments, both the
traditional demand-pull model and the supply-push model may provide insights.
Within organizations, recent innovations will to some degree be embedded in the
core technology of the business (Swanson 1994), while strategic and organizational
factors are expected to enable or constrain adoption. Thus, researchers in strategy
and organizational theory have identified characteristics of innovative firms and often
defined them as “early adopters.” Unfortunately, studies of the relationships between
innovativeness, organizational characteristics, and performance have mixed results;
in particular, early adoption seems to provide no clear path to performance
(Damanpour and Evan 1984; Pennings and Harianto 1992; Subramaniam and
Nilakanta 1996). More rigorous analyses of the antecedents to adoption and more
specific discussion of the path to performance seem to be needed.
The purpose of this paper is from this perspective to examine how a broad range of
factors affect the adoption pattern and performance at the firm level in the banking
sectors of Denmark, Finland, Norway, and Sweden. Based on survey data from IT
managers or those responsible for the IT function in 278 banks, the study
categorized adoption patterns and estimated a model of adoption estimated using
4
structural equation modeling (LISREL). The findings indicate that early adoption of
sophisticated, integrated Internet-banking solutions is associated with market
orientation, inter-firm cooperation in joint ventures, and “willingness to cannibalize”
older investments. The results also show that attractive Web sites depend on
management support and line-crossing participation in the process of implementa-
tion. With respect to performance, the analysis indicates that the causal link from
adoption of innovation to overall performance is complex and may be blurred by
complacency effects.
Theoretical Framework and Hypotheses
The Pattern of Adoption of Innovation
To understand the diffusion of innovation, distinctions have been made between
process and product innovation and between administrative and technical
innovation. According to innovation theory, product innovation is the introduction of
new products and services that shift or expand the organization’s domain, whereas
process innovation (administrative or technical) denotes the introduction of new
methods, procedures, or responsibilities within existing domains (Utterback and
Abarnathy 1975; Zmud 1982). These distinctions have been central because
facilitation factors and adoption sequences may vary between innovation types as
suggested by Daft’s (1978) dual-core model. For example, changes in the
administrative core may be facilitated by a top-down strategy, whereas changes in
5
the technical core may be facilitated by a bottom-up strategy. Product innovations
may be very dependent on market sensing and horizontal linkages.
Innovation in information systems often exhibits both product and process features
(Swanson 1994). This is especially true in the case of Internet banking. To the bank
it is a new element in operating procedure, while to the customer it is a new service
or a new range of services. Furthermore, different types of innovations are not
independent of each other, and there may be a lag pattern of typical successions. An
earlier study suggests that the adoption of administrative innovations tends to trigger
the adoption of technical innovations more readily than the reverse (Damanpour and
Evan 1984). A recent study has partially supported the hypothesis that product
innovations more often precede process innovations than follow them (Damanpour
and Gopalakrishnan 2001) although Pennings and Harianto (1992) have argued that
process innovation such as back-office automation would lead to the introduction of
new services in commercial banks, and Barras (1990) generally stressed the
process-product pattern in services.
Proceeding from these arguments, we would expect a more complex lag pattern in
which Internet banking at first could be considered as a product innovation that is
introduced to respond to a market need. Process and administrative innovations may
follow shortly after in order to adjust internal procedures and to obtain the full
benefits of product innovation. This may be seen as a specification of the
synchronous pattern that Damanpour and Gopalakrishnan (2001) found to dominate
previous bank product innovations. However, to achieve a sophisticated customer
6
use of the Internet and to increase efficiency of the mode of production of existing
products, as well as to control customer relationships, administrative and process
changes may take place before further product developments.
At the industry level, the product-process pattern is formulated as a “product cycle
model” in which the rate of product innovations is greater than the rate of process
innovations when a new domain is created, but gradually process innovations
become more frequent. At the firm level, the product-process pattern is most likely
“in response to an environmental jolt” (Damanpour and Gopalakrishnan 2001, p. 50).
The assumptions on innovation patterns are explored at a general level, and in the
more rigorous part of the analysis we propose:
H1: Recent change in business processes will exert a positive influence
on the adoption of integrated Internet-banking applications.
Stages in the Innovation Process
It is necessary to distinguish stages in implementation because explanatory factors
may vary across implementation processes. According to Galbraith (1982), the
initiating stage of a product innovation may demand units with some autonomy or
“reservations” in the sense that they are protected from routine work and work
activities involving other part of the organization. Furthermore, the adoption may be
explained by factors other than the success or failure of infusing information
technology with its work systems. As the process moves on, political factors become
7
more important, whereas more rational decision models may explain behaviors that
lead to information technology adoption (Cooper and Zmud 1990). Following
Galbraith’s (1982) line of reasoning, organizing is crucial during the last “transitio-
ning” phases, where an idea is transitioned from a reservation to an operation. In the
heart of product-development processes is cross-functional communication (Brown
and Eisenhardt 1995); for any type of innovation, the development of ownership and
sponsoring seems to be crucial if comprehensive changes are intended (Argyris and
Kaplan 1994). This is reflected in several studies of changes in control systems and
organization.
The mixed results of the association between size and innovation may reflect
different processes rather than different degrees of innovativeness. In his meta-
analytic review, Damanpour (1991, 1992) found that size is more strongly related to
implementation than to the initiation of innovations in organizations. Using a path
model, Moch (1976) found that the impact of size on innovation primarily occurs
through its effect on structure (specialization, centralization, and functional
differentiation). Taken together, these results indicate a coherent pattern where
factors normally connected to size vary in importance through the innovation
process. Large organizations use more sophisticated administrative support that may
be crucial during the implementation stage, whereas small organization may have
their advantages in the initiation and adoption stage.
As for IS innovations, other studies have shown associations between IT capabilities
such that that if firms possess the capabilities needed for IT developments, they will
8
be more ready to implement such systems (Pennings and Harianto 1992). It is also
stressed that the IT resources that help the organization provide customer service
include human technical and managerial skills and that IT has effects on intermedi-
ate business processes (Barua et al. 1995; Bharadwaj 2000). Thus, IT know-how in
the firm positively affects the adoption of Internet banking and change in business
processes.
We propose that:
H2: The more IT knowledge in the organization, the more likely it will
adopt integrated Internet-banking applications.
H3: The more IT knowledge in the organization, the more likely it will
change business processes.
Organization Structure and Adoption of Internet Banking
Organizational factors influence the adoption of innovations, and technology
influences organization. A mixed-type innovation such as the adoption of new
Internet technologies integrates information services with core business technology
and typically affects general business administration as well. As the whole
organization may be affected, such innovations are of relevance to the organization’s
strategy and competitiveness (Swanson 1994).
9
For several years researchers have challenged the presumption that technologies
drive organizational structure. According to structuration theory, technologies are
better viewed as occasions that trigger social dynamics which, in turn, may lead to
both intended and unanticipated changes in organizational structure. The actual
influence will follow an orderly pattern that depends on specific historical processes,
ongoing interactions, and distribution of expertise (Barley 1986). However,
information technology is not a totally fixed, tangible constraint. Users and system
developers may exercise a considerable influence over information technology
because applications are shaped and reshaped according to users’ demands
(Orlikowski and Robey 1991).
Ultimately, it depends on strategic intent how far and how fast the new technologies
will be integrated in key organizational processes and activities. Recent research
indicates that management’s use of a strategic investment rationale significantly
influences the level of assimilation of Web technologies in marketing activities
(Chatterjee et al. 2002). Furthermore, willingness to cannibalize other investments is
shown to be an important antecedent to the adoption of radical innovations such as
Internet marketing channels, both in manufacturing companies and in banking
(Chandy and Tellis 1998; Mols 2001; Hoest et al. 2001):
H4: The higher the degree of willingness to cannibalize, the more likely
the organization will adopt integrated Internet-banking applications.
10
Central to the concept of innovative organization are sense-and-respond capabilities,
which are related both to technological supply and consumer markets. Organizations
with a strong technological sense-and-respond capability – in a previous study called
"technological opportunism” – scan regularly for information about new technological
opportunities and threats (Srinivasan et al. 2002). More or less institutionalized inter-
firm cooperation may provide the access to external resources that form the basis for
the adoption of new technologies. For instance, banks working in a web of inter-
industry linkages more often implement certain innovations in their services
(Pennings and Harianto 1992); and, in general, networking and spanning capabilities
stemming from the crossing of several jurisdictional boundaries may be a way to
enhance the value of a service (Day 1994; Srivastava et al. 2001).
We propose more specific hypotheses as the enabling – or constraining – impact
may depend on the type of inter-firm cooperation:
H5: Participation in industry alliances will exert a positive influence on the
adoption of integrated Internet-banking applications.
H6: Participation in joint ventures will exert a positive influence on the
adoption of integrated Internet banking applications.
In regard to consumer markets, the concept of market orientation is used to describe
the sense-and-respond capability. According to Kohli and Jaworski (1990), market
orientation involves organization-wide generation of market intelligence on customer
needs, dissemination of the intelligence across departments, and organization-wide
11
responsiveness in using the intelligence in support of market-related behavior. In
empirical studies, cross-functional cooperation and a low level of interdepartmental
conflict as well as decentralization and top-management emphasis are found to be
associated with market orientation (Jaworski and Kohli 1993). The central
component of market orientation, customer orientation (Narver and Slater 1990), is
also found to be positively associated with technical and administrative innovations
(Han et al. 1998). We propose:
H7: The more market orientation in the organization, the more likely it will adopt
integrated Internet-banking applications.
H8: The more market orientation in the organization, the more likely it will change
business processes.
Management, Innovation, and Performance
The management of the innovation process has a well-documented influence on
implementation and success. First of all, management support is crucial to the
success of almost any implementation (e.g., Damanpour 1991; Kwon and Zmud
1987; Lievens et al. 1999). Particularly for the type of innovations that are intended
to influence core business processes, firms may have to shape consensus and
coordination across the firm. Thus, the extent of coordination is positively related to
Web technology assimilation (Chatterjee et al. 2002). Participation in a broader
sense may be associated with ownership/involvement which in turn also may lead
12
successful implementation (e.g., Ives and Olson 1984). Front-line employees who
are well informed on customers’ preferences may be key persons in this respect.
Few studies have extended the analysis of information system innovation to include
performance measures. This is a general problem in organizational studies
connected to the concept of performance, which has been analyzed at different
levels and from different approaches, and usually with ambiguous results. In the
words of March and Sutton (1997): “Most studies of organization performance are
incapable of identifying the true causal relations among performance variables and
other variables correlated with them...” (p. 702). Obviously, it is very difficult to
explain ultimate profitability measures, and often researchers have to focus on more
specific measures.
Thus, several dependent variables are used in studies of the success of information
systems, but only a few steps are taken in assessing the impact of information
systems on organizational performance (DeLone and McLean 1992). Using specific
concepts related to department, group, or even individual performance causes the
number of criteria to increase radically, but it seems to be a necessary step to
obtaining valid research results (Dalton et al. 1980). Such work provides the basis for
formulating more comprehensive models, for example connecting specific concepts
of information system quality to usage and user satisfaction, which in turn could be
associated with organizational impact (DeLone and McLean 1992). In line with this,
research on the impact of information systems indicates that superior IT capability
leads to increased firm performance, but in order to identify the full chain of variables
13
connecting IT capability to performance, additional research is still required
(Bharadwaj 2000).
In our model we suggest that performance is analyzed as outcomes at different
levels. The first level outcome is functional performance, closely related to the
technical capabilities of a system. At this level, the causal linkage is expected to be
most certain. We propose:
H9: The more integrated Internet-banking applications are adopted in the
organization, the more likely it will have implemented a successful
Internet bank.
H10: The more IT knowledge in the organization, the more likely it will
have implemented a successful Internet bank.
H11: Recent change in business processes will exert a positive influence
on successful implementation of an Internet bank.
The second level outcome is performance at the service/product level indicating the
value to the customer. In this case the attractiveness of the Internet-bank solution is
a close indicator:
H12: Successful implementation of an Internet bank is positively associ-
ated with the attractiveness of the Internet/PC-bank solution.
H13: Recent change in business processes is positively associated with
the attractiveness of the Internet/PC-bank solution.
14
H14: The more integrated Internet-banking applications are adopted in the
organization, the more attractive the Internet/PC-bank solution.
H15: The more line-crossing cooperation, the more attractive the
Internet/PC-bank solution.
H16: The more management support, the more attractive the Internet/PC-
bank solution.
At the overall level, the causal link to information system innovation becomes uncer-
tain. Customer relationship performance including elements such as customer reten-
tion; the identification of profitable customer segments has been shown to be associ-
ated with Internet-banking adoption (Flohr Nielsen 2002), but there is hardly evi-
dence of a clear path to ultimate measures of financial performance. This part of the
analysis in our study remains explorative in nature.
The basic model is summarized in Figure 1.
15
Figure 1. Model of Internet Banking Innovation
16
Methods
The Sample
Nationwide surveys in Denmark, Finland, Norway, and Sweden form the main part of
the empirical basis for this article. During the fall of 2000, questionnaires were sent
to all banks with more than four employees. In order to find well-informed and com-
parable respondents, the marketing managers and IT managers were identified in
advance by phone calls to the head offices. The use of two types of respondents
was intended to support the testing for common-respondent bias and for the one-
informant problem on performance measures.
In order to obtain a higher response rate, which is normally low in this kind of study,
we limited our survey instrument to a convenient and easily read format, and re-
minded respondents by personal phone calls.
A total of 41 per cent of the IT managers, who were central informants in the analy-
sis in this paper, completed the questionnaire. The response level of the IT manag-
ers varied across countries with a response rate of 56 per cent in Denmark, 28 per
cent in Finland, 57 per cent in Norway, and 43 per cent in Sweden. The number of
returned questionnaires was 69, 91, 78, and 40, respectively. If the small Finnish
cooperative banks that could partly be considered as branches of the same corpora-
tion were excluded, the overall Nordic response rate increases to 50 per cent. The
non-response analysis showed that small companies were significantly
17
underrepresented in the resulting sample. Still, the sample is dominated by small
and medium-sized banks (Appendix 1). Sample size will be lower in the reported
LISREL analysis because observations with missing values are deleted.
As data were collected from Denmark, Finland, Norway, and Sweden, standardiza-
tion has been important. The same data collection procedure was employed simulta-
neously in all countries (over the two-month period of the survey). Language differ-
ences are small between Danish, Norwegian, and Swedish, but to ensure an ade-
quate translation, the questionnaires were formulated in English and Danish and
then translated into each of the other Nordic languages in order to avoid the interpre-
tation problems stressed in the literature on cross-cultural comparative methods (Ri-
chins and Verhage 1987; Hui and Triandis 1985).
Measures
Although we are indebted to the development of constructs from the empirically ori-
ented literature, more objective and industry relevant measures are used whenever
possible. Furthermore, when perceptual measures are used in measuring perfor-
mance, using two respondents from the same organization moderates the one-infor-
mant problem. Only the market orientation construct MARKOR, developed and test-
ed by Kohli, Jaworski and Kumar (1993), is used without any changes. The inte-
grated Internet banking construct is based on reports on the emerging implementa-
tion of six applications combined with an item measuring the degree of Internet bank-
18
ing integration with other systems. This is related to the innovation constructs used
by Han et al. (1998) and Damanpour and Gopalakrishnan (2001).
All the measuring instruments are shown in Appendix 2. The items on market orien-
tation are measured on 5-point Likert scales ranging from “strongly agree” to “strong-
ly disagree.” Performance measures including Internet-bank attractiveness, cus-
tomer retention, and financial performance are based on respondents’ ratings on 5-
point scales ranging from “worse than competitors” to “better than competitors.”
These performance measures are found to be both comparable and valid in a study
of banks, where respondents are normally well informed on actual market-related
performance. Face validity of the self-reported measure on performance was sup-
ported by significant correlations between IT manager responses and marketing-ma-
nager responses on each item (p < 0.0001).
IT knowledge is an index based on a three-item construct capturing expertise in in-
teractive media, information analysis, and software development (Cronbach’s alpha
= 0.8495).
It should be noted that several measures were purified after the collection of data.
Ordinal scales were often simplified to give the variables properties suited for the
analysis.
Web technologies in the Nordic sample
19
Despite similarities across countries, there are differences in the degree to which
organizations have applied new information technologies to improve the service of-
fered to customers. There are, however, also remarkable similarities across organi-
zations of different size and across countries. Internationally, the Nordic countries
are generally advanced in their use of Web technologies; some of the large banks
are considered world leaders in Internet banking (Brown-Humes 2000; Holland and
Westwood 2001). Finland has the highest share of customers using the Internet to
access and conduct personal banking, while Denmark and Sweden are on par with
the United States, and Norway slightly lower (Mikkelsen and Gaarden 2000).
Nevertheless and perhaps surprisingly, there seems to be little difference between
small and large banks regarding the extent to which they offer Internet banking – 83
per cent of the small (with less than 25 employees) and 89 per cent of the large
banks offer the basic option. Compared to the United States, this is interesting since
only 7 per cent of smaller US banks (less than 100 M. USD in assets) offered this
option in the fall of 1999 – one year prior to this survey (Furst et al. 2000).
Findings
Mapping the Pattern
As a first step in the analysis, the actual state of Internet banking was mapped ac-
cording to how far the banks had come in adopting product and process
20
Table 1. State of Implementation in the Nordic Banks
Based on responses from IT-managers (N = 278)
Nothingcurrently
(%)
Consid-ered,planned,or imple-menting(%)
Imple-mented
(%)
Success-fullyimple-mented
(%)
Product/Service Innovations
Internetbank..............................................................On-line securities trading..........................................E-commerce on W eb site offering third-party products and services............................................Cell-phone banking - basic information services .....Cell-phone banking - advanced, interactive Services……………………………………………….Product and service ordering via W eb s ite...............
Process Innovations
W eb site integrated / connected with other IS systems ………………………………………………Systematic collection of information regarding customers’ use of your firm ’s website....................All custom er information consolidated in one single database..........................................................……Com plete view of individual customer’s use of distri bution channels...............…………………………...Com plete view of individual custom er’s re lationship with the bank....................................................…..Credit-scoring - fully automated estimate of custo- mers’ credit-status / credit-worth iness...............….Electronically generated estimate of customer lifetime value............................…… ……………...
56
5117
2912
25
17
9
25
10
33
61
1035
3643
5435
34
43
32
41
29
43
26
3638
1029
1241
32
35
41
26
42
18
12
4922
311
512
9
5
18
8
20
6
1
Highest percentage underlined (by row)
innovations and how broad in scope the adopted applications were. From this analy-
sis rather distinct patterns seemed to emerge. Although 85 per cent of the Nordic re-
tail banks in our study offer a basic Internet-banking solution to their customers,
there is considerable differences in the degree that the banks have added other
applications. The percentage offering more sophisticated applications such as inter-
21
active cell-phone service is low (about 18 per cent) and only 54 per cent offer inter-
active product and service via the Internet.
The possible lag pattern – through typical successions as depicted by the underlined
numbers in Table 1 – is a complex issue. First of all, the banks follow several paths
in their adoption of the Internet and related technologies. Second, the adoption of
product-like innovations may precede or follow administrative or process innovations,
depending on the application in question. Normally, though, the basic Internet-bank-
ing solution is the first innovation considered. As for the other innovations, our data
give some support to the assumption that if any product or administrative/process
innovation is adopted, an innovation of the other type will at least be planned. Thus,
our snapshot primarily seems to reflect the synchronous pattern found to dominate in
longitudinal studies of related types of innovations (Damanpour and Gopalakrishnan
2001).
In the next step of analysis, the information on product/service innovations in Table 1
was combined with information on more fundamental recent change in business pro-
cesses. On the basis of these data, we classified the cases into five types:
Type 1: Non-adopters: Banks without Internet banking and without recent businessprocess change.
Type 2: Isolated Internet-adopters: Banks with a single Internet application imple-mented and without recent business process change.
Type 3: Process-focused Internet-adopters: Banks with a single Internet applicationimplemented and with recent business process change.
Type 4: Application-focused adopters: Banks with more than one Internet applicationimplemented and without recent business process change.
Type 5 : Integrating adopters: Banks with more than one Internet application imple-mented and with recent business process change
22
Characteristic antecedents of these innovation patterns are summarized in Table 2.
Table 2. Type of Adoption and Antecedents
Rank of Mean-Scores
Size
IT-
Know-
ledge
Own
de-
velop-
ment
Inter-firm cooperation
in development *)
Industry
alliance
Joint ven-
ture
with other
financial
service or-
ganization
Type 1:
Non-adopters (N = 19) 5 4 3 5 3
Type 2:
Isolated Internet-adopters (N = 25) 4 3 4 1 4
Type 3:
Process-focused adopters (N = 92) 2 2 2 3 5
Type 4:
Application-focused adopters (N = 27) 3 5 5 4 1
Type 5:
Integrating adopters (N = 100) 1 1 1 2 2
Ranking: Rank 1 indicates highest mean-value; rank 5 indicates lowest mean-value
in column
* ) A few banks - typically non-adopters and most seldom integrating adopters - are in-
volved in joint ventures with IT companies. Because of the small numbers, this variable is
excluded from the quantitative analyses.
Non-adopters, as expected, are normally characterized as small banks with few IT
resources. Management may explain the reason for their few Internet initiatives by
referring to a personal service strategy, and in fact they seem to have a real choice.
At least they do not all report lack of IT knowledge. In a similar way, the internal
23
process-focused (and late Internet- adopters) are relatively well equipped with IT
knowledge, but these normally rather large banks seems to prefer to move slowly
with their own development and to change internal business processes early. As ex-
pected, the most elaborate, integrating Internet adopters are found among the large
banks with most IT knowledge. Most often they have their own development but they
are often involved in development through industry alliances and joint ventures with
other financial organizations. The applications-focused adopters seem inactive in
their own development and in adjusting internal procedures.
Hypothesis Testing
Structural equation modeling provided the means of simultaneously assessing the
quality of measurement in our model and the relationships among constructs. Al-
though our analyses were explorative, we were able to test the a priori specified path
model. However, sample size only allowed us to use a limited number of manifest
variables, and several constructs were treated as mean-scores of the items in the
estimation.
The estimation of the full LISREL-model (Figure 2) used the polychoric correlation
matrix and the asymptotic covariance matrix for the 14 manifest variables based on
199 observations as input; the LISREL model was then estimated by the method of
weighted least squares (Jöreskog and Sörbom 1996). Confirmatory factor analysis,
as part of the structural equation modeling using LISREL, showed satisfactory reli-
ability of the constructs willingness to cannibalize and line-crossing cooperation,
24
whereas the reliability of the construct integrated Internet banking was acceptable
though less satisfactory as one of coefficients of the construct fell to 0.45.
In the further search for a good model we removed two insignificant paths with close
to zero coefficients from the initial model, and the reduced model (Figure 3) im-
proved the parsimony goodness-of-fit index (PGFI = 0.47). Also, considering the in-
crease in degrees of freedom (d.f. = 50), this model could be preferred. It should be
noted that both models had an acceptable fit (GFI = 0.98) and that the significant
path coefficients from the initial model estimation hardly changed after the reestima-
tion.
The estimated initial model in Figure 2 consists of both a structural equation model
based on latent variables corresponding to the theoretical model from Figure 1, and
measurement models for the latent variables. Despite some insignificant paths, our
estimation of this initial model showed that the overall fit was good (see Appendix 3).
Furthermore, the model explained 33 per cent of the variation in the variable Inte-
grated Internet banking and 45 per cent of the variable Implementation success. In
the reduced model the respective percentages are 34 per cent and 46 per cent.
The model gave no support for the hypothesis of a positive influence of recent chan-
ge in business process on the adoption of integrated Internet banking (rejecting H1)
or on the successful implementation of an Internet bank (rejecting H11) or on the
Internet bank attractivesness (rejecting H13). In fact, there was a negative relation-
ship between recent change in business process and Internet bank attractiveness.
25
The model gave support to the hypotheses that IT knowledge positively influence
business process changes and implementation success (supporting H3 and H10) but
there was no significant path to integrated Internet banking (rejecting H2). Willing-
ness to cannibalize and market orientation were positively related to integrated Inter-
net banking (supporting H4 and H8), which in turn remained positively related to
Figure 2. Estimation of Initial Model
26
Figure 3. Estimation of Reduced Model
27
implementation success (supporting H9) and to Internet-bank attractiveness (signifi-
cant path in the reduced model – supporting H14). Internet bank attractiveness was
positively influenced by line-crossing cooperation and management support (sup-
porting H15 and H16) but not by implementation success (rejecting H12).
Inter-firm cooperation had different impacts dependent on the character of the coop-
eration. Development in an industry alliance had a negatively, insignificant impact on
integrated Internet banking (rejecting H5) whereas joint ventures with other financial
organization was positively related to integrated Internet banking (significant at the
0.10-level in the reduced model – supporting H6).
Performance as dependent variable - beyond the “mixed” results
Our estimated model shows significant paths to the attractiveness of the Internet-
banking solutions, but only a small part of the variance of this dependent variable is
explained by the model (R2 = 0.15). Trying to explain performance at an upper level
becomes even more difficult; the cautious conclusion made in a recent study includ-
ing overall performance is representative for this kind of research: “(results) ... sug-
gest that probably the synchronous pattern of adoption of product and process inno-
vations help banks better their performance than the lag pattern” (Damanpour and
Gopalakrishnan 2001, p. 58).
Although our results seem to be in line with this conclusion, they may also indicate a
caveat on causality. As shown in Table 3 below, the integrating adopters are typically
28
top scorers on Internet-banking attractiveness and customer retention whereas non-
adopters are at the bottom on both scores. However, scores on financial perfor-
mance (profitability and market share) seem related to innovation in another way, as
the non-adopters on average are in the second-best category and the integrating
adopters are in the middle.
Thus, it may not be sufficient only to consider performance as caused by new initia-
tives such as the adoption of Internet banking. In fact, the causal link may be the op-
posite. Past success shown in financial performance or a high market share may
lead to inertia or weakness driven by complacency (Cravens et al. 1997). This may
be especially relevant in the financial service sector; it can be a problem to both
large and small banks, because small banks often have a high market share in the
local community. Low performers may choose – or be forced – to innovate in differ-
ent ways such as business process reengineering on older activities. High perform-
ers are not necessarily first movers. This is indicated by the fact that non-adopters
are found among the highest performers in terms of recent financial performance
(i.e., last year’s profitability) in Table 3.
29
Table 3. Adoption and performance indicatorsRank of Mean Scores
Performance indicator
Attractive-
ness of
Internet/PC
bank
Customer
retention
Financial
perfor-
mance
Type 1:
Non-adopters (N = 19) 5 5 1
Type 2:
Isolated Internet-adopters (N = 25) 3 3 5
Type 3:
Process-focused Internet-adopters (N = 92) 4 2 4
Type 4:
Application-focused adopters (N = 27) 2 4 2
Type 5:
Integrating adopters (N = 100) 1 1 3
Ranking: Rank 1 indicates highest mean-value; rank 5 indicates lowest mean-value
in column
Discussion and Implications
As shown in a longitudinal study of process and product innovations the synchro-
nous pattern seems to be a better description of actual innovations than the lag pat-
tern (Damanpour and Gopalakrishnan 2001). It should be emphasized, however, that
when the innovations – as in our study – are all connected to Web technology in
banking, there is a rather strong interdependence among innovations which may be
associated with a weak lag pattern. Lag patterns may still be found at another level
when innovation types are measured in less interdependent areas of the organiza-
tion.
30
Internet banking is, however, representative of new Web technologies in the sense
that it changes marketing and organizational practices. It is also representative in the
sense that innovations at the firm level take place as a partly proactive response to
both market-pull and supply-push pressures. As other recent studies (e.g., Sriniva-
san et al. 2002) indicate, our results suggest a integrated model to describe organi-
zational adoption of these innovations.
Specific parts of our analyses seem both to contribute to support of some recent
studies and to add new light on previous findings. Thus, findings that show the im-
portance of willingness to cannibalize in the adoption of integrated Internet channels
is in line with findings in the manufacturing sector (Chandy and Tellis 1998; Hoest et
al. 2001). Similarly, the association between market orientation and administrative
and technical innovation is also found in recent studies (Han et al. 1998). In order to
achieve customer friendly solutions, cross-functional process management that also
involves the front-line employees seems important.
On inter-firm cooperation, our results indicate a need for specification in future stud-
ies because taking part in joint ventures with specific financial partners seems to be
a faster road to innovation adoption than joining an industry alliance.
While our results stress innovations as integrated and interactive processes, this in-
dication also points to a general problem of performance effects in information sys-
tem studies. To move beyond mixed or inconclusive results, performance has to be
analyzed at several levels. Causal structure may be obvious at a functional level. But
as we turn to an overall level, performance seems to be better considered as expla-
31
nations of initiatives or inertia. To establish the link between innovations and overall
performance, more specific analyses are probably needed in future research.
Our findings question the role of business process change in the customer-related
innovations that are in focus. The close succession between process and product
innovation, which the longitudinal study of Damanpour and Gopalakrishnan (2001)
suggests, does not materialize in the sense that changes in business process simply
lay the ground of the innovations or establish the path to performance. Poor financial
performance may force banks to a business process reenginering project, which be-
comes an independent act that may even hamper customer-related performance.
The link from business process reengineering to performance with information tech-
nology in an enabling role as suggested by Hammer and Champy (1993) seems
weak. Technology does not cause organizational structure or organizational perfor-
mance in a straightforward way: according to theories of structuring, technologies
should rather be considered as “occasions that trigger social dynamics which, in
turn, modify or maintain an organization’s contour” (Barley 1986, p. 81). Cross-sec-
tion methods cannot fully grasp the complex pattern of interaction in these pro-
cesses. Ideally, it requires a research strategy that is more sensitive to the contex-
tual dynamics by which structuring takes place. From this perspective, our study is
only a small step towards deeper insight, and further research should take the social
history of the organizations into consideration.
Nevertheless, our findings may have implications to practitioners. First of all, the
32
early adoption of sophisticated Internet banking is hardly related to performance
measures and should be considered with caution. It is probably dangerous to be too
late in the game but beyond the adoption of basic application and an easy-to-use
website there seems to be no first mover advantage. Secondly, data indicate that
successful innovations are sensitive to involving employees or managers outside the
IS-functions. It may be a special challenge to involve front-line employees. How can
front-line employees who may feel threatened by the new technology be expected to
help in the implementation process - and in getting customers to adopt more of the
technological services? In this respect the technology of participation may have to be
developed. Thirdly, inter-firm cooperation may explain why even small Nordic banks
have been able to adopt Internet banking at an acceptable level. If adoption is mostly
needed it may, however, be a pitfall to rely on institutionalized industry alliances in
stead of specific joint ventures. Then willingness to cannibalize also becomes cru-
cial.
Conclusion
The very use of the concept of “ pattern of innovation” signals a belief in typical suc-
cessions. In real life it appears that the diffusion of innovation is a complex interac-
tive phenomenon. Process innovation may either precede or follow product innova-
tion. This possibility is also reflected in this study. Nevertheless, there are regularities
in the sense that the study identifies antecedents to adoption, implementation, and
integration of Internet-banking applications.
33
Partly based on rigorous modeling, our results have shown significant paths from
inter-firm joint ventures, IT capabilities, market orientation, and “willingness to canni-
balize” to the adoption of integrated Internet banking. It is also indicated that attrac-
tive Web sites depend on management support and line-crossing participation in the
process of implementation At this level of performance there seems to be some de-
gree of causal relationship. At an overall level of performance, technological instru-
mentality is questioned and the associations are blurred both by complacency effects
and by the fact that high performers may find several ways to provide value to their
customers. First-movers are not necessarily winners.
From a wider perspective, our findings on Internet banking fit well with Swanson’s
(1994) provident work on the diffusion of IS innovation, where he stresses that inno-
vations are seldom restricted to the functional IS core or the administrative core. It
has become important to view IS innovation in the larger organizational context in
which it takes place. The Internet has only made it more important with a context in
which the role-players are not only users, vendors, and consultants but customers as
well. As we move towards integrated solutions, it is factors like participation, cross-
functional cooperation, and management support that become crucial. Now the tech-
nology of participation may need to be developed as well.
34
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Appendix 1. Profile of main respondents (“IT managers/IT responsible”)
Danish Finnish Norwegian Swedish
SmallBank
s
LargeBanks
SmallBanks
LargeBanks
SmallBanks
LargeBanks
SmallBanks
LargeBanks
N 19 50 59 29 29 48 18 21
Seniority,years(Means)
10.0 16.1 17.0 12.0 13.2 13.4 14.1 17.5
IT specialized positions * 50 % 80 % n.a. 28 % 83 % 50 % 71 %
* Percentage indicated by reported position - based on 94 answers to a surveyquestionNote:“Small banks”: less than 25 employees. “Large banks”: 25 or more employ-ees.
41
Appendix 2. Measuring Instruments Used
Change in Business Processes[Scale: No initiatives for the last 5 years (0), Involved directly or indirectly in initiatives(1)]
Integrated Internet-banking (two items)Adoption of integrated Internet-banking applications(1) [BROAD_AP] Number of reported implementations/successful implementationsof the following 6 applications:- Internet-bank- On-line securities trading- E-commerce on Web site offering third party products and services- Cell-phone banking - basic information services- Cell-phone banking - advanced, interactive services- Product and service ordering via Web site(2) [INTEGRAT] Web-site integrated / connected with other IS systems[Scale: Not considered (1), Considered (2), Planned (3), Under implementation (4),Implemented or Successfully implemented (5)]
IT-Knowledge [IT_KNOW]Index based on an average score on these items:- To what extent does your firm possess expertise in interactive media?- To what extent does your firm possess expertise in information analysis?- To what extent does your firm possess expertise in software development?[Scale: Not at all (1), To a minor extent (2), To some extent (3), Very much (4), Don’tknow / irrelevant (5)]
In Industry alliance [ALLIANCE]Inter-firm cooperation via industry alliance:“How did you develop and implement, or plan to develop and implement, the follow-ing technologies (Internet-bank)”[Scale: Own development via existing competencies and systems (1), Own develop-ment coupled with hiring of new staff and purchase of software (2), Via industry-alli-ance (3), Joint venture / alliance with other financial services firm (4), Joint venture /alliance / agreement with IT or telecommunications firm (5), Acquisition of firm ormerger-participation (6) - more than one option possible](Dichotomized variable in the reported analysis: Cooperation "Via industry-alliance"is given the value 1. When no industry-alliance is reported the variable is given thevalue 0).
In Joint Venture [JOINT]Inter-firm cooperation via Joint venture / alliance with other financial services firm:“How did you develop and implement, or plan to develop and implement, the followingtechnologies (Internet-bank)”[Scale: Own development via existing competencies and systems (1), Own develop-ment coupled with hiring of new staff and purchase of software (2), Via industry-alli-ance (3), Joint venture / alliance with other financial services firm (4), Joint venture /
42
alliance / agreement with IT or telecommunications firm (5), Acquisition of firm ormerger-participation (6) - more than one option possible](Dichotomized variable in the reported analysis: Cooperation in “Joint venture / alli-ance with other financial services firm” is given the value1. When no joint venture isreported, the variable is given the value 0).
Willingness to cannibalize (two items)[CANNIB1] We are willing to support Internet projects even though they take awaysales / customer contacts from existing marketing channels[CANNIB2] We are willing to sacrifice sales / customer contacts through our existingchannels in order to stake on Internet-based sales) [Scale: Strongly agree (1), Agree (2), Yes-and-no (3), Disagree (4), Strongly disagree(5) - score reversed]
Market Orientation [MARKOR]An index based on the MARKOR-construct developed by Kohli, Jaworski & Kumar(1993), i.e., an average of the Intelligence generation-score (6 items), the Intelligencedissemination-score (5 items), and the Responsiveness-score (11 items).
Line-crossing cooperation (two items)“... you or other employees ... involved in your company’s latest initiatives within thefollowing areas” :[CROSS_F] In the introduction of Internet bank and cell-phone bank: Marketing re-sponsible/manager has participated (1) Else (0)[FRONT] In the introduction of Internet bank and cell-phone bank: Customer advisorshave participated (1) Else (0)
Management support [MANASUP]To what extent is there mutual understanding and cooperation among top manage-ment and the IT function/department[Scale: Not at all (1), To a minor extent (2), To some extent (3), very much (4), Don’tknow / irrelevant (5)]
Implementation success [SUCCESS]Number of reported successful implementations of the following 6 applications:- Internet-bank- On-line securities trading- E-commerce on Web site offering third party products and services- Cell-phone banking - basic information services- Cell-phone banking - advanced, interactive services- Product and service ordering via Web site
Internet-bank Attractiveness [ATTRACT]How well have the objectives on establishing an attractive Internet-banking solutionbeen met during the past two years? [5-point scale ranging from “Worse than competitors” to “Better than competitors” ]
43
Other Performance Measures Used in Table 3:
Customer retention: “ Keeping existing customers”Financial performance: “Last year’s profit on the banking activities”
[5-point scales ranging from “Worse than competitors” to “Better than competitors”]
44
Appendix 3. Goodness-of-Fit Measures of Estimated LISREL Models
____________________________________________________________________
Initial model Reduced model____________________________________________________________________
Sample size 199 199Chi-square test statistic 57.60 57.84Degrees of freedom 48 50Prob-value 0.162 0.208
Population discrepancy function (F0) 0.048 0.040Root mean square of approximation (RMSEA) 0.032 0.028Prob-value for test of RMSEA < 0.05 0.85 0.89
Expected cross-validation index (ECVI) 0.87 0.85ECVI for saturated model 1.06 1.06 Goodness-of-fit index (GFI) 0.98 0.98Adjusted goodness-of-fit index (AGFI) 0.96 0.97Parsimony goodness-of-fit index (PGFI) 0.45 0.47___________________________________________________________________
