Kim and Davidson (2004) pointed out that investing in information communication technology by banks is comparable to manufacturing firms investing in research and development. They argued that banks invest in on-line banking systems such as automated teller machines, automated response systems, internet banking in order to provide banking products and services. Use of ICT should be aligned to business strategy and the benefits thereof may be financial or non-financial (Phillips and Wright, 2009). There seem to be mixed reactions and findings as to the effect of ICT on profitability.
A study by Kim and Davidson (2004) on the effect of ICT expenditure on the performance of the Korean banking sector revealed that investment in ICT increases market share and productivity, reduces operating costs, increases future economic benefits as well as profitability.
A study by Siam (2006) on the impact of electronic banking on the Jordanian banking sector profitability revealed that there was a negative correlation between increases in adoption of electronic banking and profitability in the short run. This was attributed to the fact that the revenue derived from investment of electronic commerce technology may not be able to cover the capital expenditure and staff costs related to that technology in the initial years. The findings from the study on the profitability of electronic banks in Jordan by Siam (2006) also found out that the impact of electronic banking on the Jordanian banking sector had a positive effect in the long run.
A study by Dzama and Matavire (2013) on the adoption of e-commerce by CBZ branches in Bulawayo suggested that e-commerce can increase profits through helping firms to increase sales and decreasing costs. They argued that most of the benefits of e-commerce contribute to profit whilst the
33 disadvantages of e-commerce increase costs thereby decreasing profits. A study by Poon (2008) in Malaysia highlighted that e-commerce enables small firms to easily access customers in other geographically dispersed saving advertising costs. This helps small firms and banks to compete with large banks for customers in geographically dispersed markets. The research findings on the CBZ case study by Dzama and Matavire (2013) revealed that CBZ has not been able to access the rural population due to absence of electricity in rural areas in Zimbabwe resulting in reduced access.
Any new project or any changes to the business model of an institution can result in cash inflows or outflows. Similarly the adoption of e-commerce as part of the business model or strategy of an organisation may have a negative impact on the profitability in the short run and a positive impact on profitability in the long run (Siam, 2006). A study by Sumra, Manzoor, Sumra and Abbas (2012) on the impact of e-banking on the profitability of Pakistan banks revealed that electronic banking has contributed towards the profitability of Pakistan banks emanating from cost reductions, reduced workforce, improved efficiency, time, accuracy and reliability. This was consistent with the study by Siam (2006) on Jordanian banks which revealed electronic banking resulted in the increase in the number of customers and transactional business, increased quality of service, reduced transactional time and effort required, enhanced customer loyalty and reduced operational costs thereby increasing profits.
Frenzel and Frenzel (2004) identified that companies such as Travelocity and Fedex make use of large, flexible and integrated e-business infrastructures that essentially create value, reduce costs and streamline the business processes. They also argued that organisations decide to adopt e-business as part of their strategic planning and decision making, which is consistent to what was pointed out by Kim and Davidson (2004). Haag and Cummings (2010) indicated that e-business products and services such as online banking and automated teller machine (ATMs) have assisted banking institutions in reducing costs of services as well as increasing revenues
34 through offering new products such as selling stamps over the automated teller machines (ATMs).
A study by OECD (2007) in the Dutch retail banking sector between 1999 and 2006 revealed that there was high use of credit cards in Netherlands than any other European Union countries. The study in 23 EU member countries also revealed that retail banking institutions made profit from issuing credit cards with a weighted profit-to-cost ratio of 15.9% in 2009 more than they did on debit cards acquirers that had a weighted profit-to-cost ratio 5%. From this analysis, it can be noted that banks make money from issuing cards as well as transactional fees. It therefore implies that banks have to issue more cards and encourage customers to increase the volumes of transactions through carrying out promotional and awareness campaigns to educate clients (Siam, 2006). This will help in increasing fees and commission income.
McKinsey (2006) found out that banks in Netherlands made losses on payments services to individual customers than on payment services offered to companies. This shows that the banks thrive on volumes in order to make profit from transaction processing and e-commerce products in general.
2.6.1 PERFORMANCE ANALYSIS MODELS
Collier (2003) defines profitability as the matching of income to expenses that are incurred in earning that income. Profit is simply the difference between income and expenses. There are several models that are used to measure profitability namely the return on investment, return on capital employed, gross profit margin or the net profit margin. For the purposes of this study the research will focus on the return on investment, earnings growth, market share analysis, customer awareness and satisfaction, and the total cost of ownership models.
2.6.2 Return On Investment (ROI)
This measures the after tax return that the shareholders earn as a percentage of their investment into the business (Collier, 2003). It represents the return per dollar invested into the project. Stair and Reynolds (2006) defined return
35 on investment as the benefits or profits or earnings that are generated expressed as a percentage of the amount invested in IS Technology. The productivity paradox, of the late 1980s and the early 1990s which was characterized by low productivity against increases in investments in information systems resulted in economists coming up with several researches about profitability (Stair and Reynolds, 2006).
Most software companies and computer companies are also coming up with packages that assist their customers in calculating potential profits from investments in information systems (Stair and Reynolds, 2006). Frenzel and Frenzel (2004) suggested that organizations can make use of payback period method, net present value (NPV), the internal rate of return (IRR) after the cost-benefit analysis or the analysis of the expected return on an information system or technology investment. The net present value method, internal rate of return and the discounted payback method consider the time value of money, forecasted cash flows and opportunity cost and are therefore very important aspects of investment appraisal methods (Brealey and Myers, (2003).
2.6.3 Earnings Growth
An analysis of earnings growth provides a basis for organizations to measure the impact of investments in a particular project or technology. Stair and Reynolds (2006) suggested that another approach to measure the contribution of the value of an Information System (IS) is by measuring or calculating the increase in profit or earnings growth.
2.6.4 Market Share Analysis
The size of the market of an organisation can also help in determining the extent to which the adoption of an information system can increase the profitability. Kotler (2002) distinguished between the served market share, which he defined as sales of a company expressed as a percentage of the total sales of its served market and the relative market share, which he referred to as the size of the market of an organisation expressed as a percentage of the market share of the largest competitor.
36 2.6.5 Total Cost of Ownership
Stair and Reynolds (2006) suggested that organisations can make use of the total cost of ownership (TCO) model developed by the Gartner Group, to assess their cost structures. The TCO model analyses the components of cost of information systems and related technology by categorising cost into cost of acquiring the technology (initial outlay), technical support and back-up services, administration costs, cost incurred though operations by end users, retooling and training costs (Stair and Reynolds, 2006). An organisation can make use of total cost of ownership model by analysing the total costs of different information system projects but will also have to project the anticipated revenue or inflows to be generated from those projects, and then choose the project with a higher return. Such a model may be effective if combined with other project appraisal techniques like the net present value (NPV), internal rate of return (IRR), payback period method and the accounting rate of return (ARR) methods.
2.6.6 Customer Awareness and Satisfaction
This is an indirect method of analysing profitability whereby firms make use of feedback from users of information systems (Stair and Reynolds, 2006). The method involves the use of questionnaires and surveys to establish the impact of information systems on consumer awareness and satisfaction. Siam (2006) on the study of the impact of electronic banking on the Jordanian banking sector profitability suggested that the best ways of ensuring effective customer awareness involve training of employees and gathering feedback from customers. The adoption of e-commerce may be affected by the level of literacy of the intended users or beneficiaries.
Siam (2006) argues that non-perfect understanding of electronic banking by customers result in a low uptake of e-commerce products and services by customers, which would reduce the volume of transactional business. More so, the study by Siam (2006) on the role of electronic banking services on the profits of Jordanian bank revealed that college students in Jordan preferred electronic banking compared to other sectors of the population. This study
37 sought to explore ways to enhance customer awareness and satisfaction from the use of e-commerce products, services and channels.
Other valuation methods may include Cost to income ratio and Net Interest Income method (Jayaratne and Strahan (1996); Rajan and Zingales (1998);
Demirguc-Kunt and Maksimovic (1998); Beck, Levine, and Loayza (2000) and Levine, Loayza, and Beck (2000), and Wurgler (2000).