CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 Conceptual Review

2.1.1 History of Automated Banking In Nigeria

Banking has come a long way from the time of ledger cards and other manual filling system to

the computer age. The Structural Adjustment Programme (SAP) initiated in 1986 by the

Babangida Administration brought an end to the kind of banking services rendered by the first

generation of banks which have been described as “Arm Chair Banking”. The SAP changed not

only the structure but also the content of banking business. Just as the number of banks grew

tremendously from 40 in 1985 to 125 in 1991, the SAP made possible the licensing of more

banks and which posed more threat to existing ones and the more aggressive the marketing

techniques adopted by them. In the process of the intense competition, adoption of electronic

banking was seen as a necessity to maintaining a good competitive position. Whereas e-banking

stormed the British Banking scene in the late sixties, Nigeria started the long and tortuous

journey in November 1990 when Society General Bank launched their first Automated Teller

Machine.

Later on, the scenario became different. Banks have not only adopted computerization, but

advanced from very simple and basic retail operations of deposits and cash withdrawal as well as

cheque processing, to the delivery of sophisticated products which came as a result of keen

competition in view of unprecedented upsurge in the number of banks and branches as well as

advancement in information technology. There was the need to innovate and modernize banking
operation in the face of increased market pressure and customers demand for improved service

delivery and increased convenience.

The introduction of e-banking (e-payment) products in Nigeria commenced in 1996 when the

CBN granted All States Trust Bank approval to introduce a closed system electronic purse called

ESCA. This was followed in February 1997, with the introduction of a similar product called

“Paycard”, by Diamond Bank. The card-based e-money products assumed an open platform with

the authorization in February 1998 of Smartcard Nigeria PLC, a company floated by a

consortium of 19 banks to produce and mange cards called “value cards” and issued by the

member banks. Another consortium of more than 20 banks under the auspices of Gemcard

Nigeria Limited obtained CBN approval in November 1999 to introduce the “Smartpay”

Scheme. The number of participating banks in each of the two schemes had been rising since

then.

Some banking services that have been revolutionized through the use of ICT include account

opening, customer account mandate and transaction processing, recording, deposit customer

services, etc. Electronic banking became prominent after the Central Bank of Nigeria banking

reformation exercise in June 2004, which was geared towards reducing the number of banks in

the country and making the emerging banks much stronger and reliable.

Before this period, it took time for transactions to be completed on the floor of Nigerian banks.

Customers were driven away from banking transactions just because of poor services and

facilities. But with electronic banking, the scenario became different. The banks official websites

(almost all the commercial banks have their own websites) properly enlightens customer and the

public as to the activities of the banks. It can give any visitors or customers all the information
about the operations of the banks such as account opening information, information about

internet banking viz: access to online balance of customer’s account, transfer of funds to third

party and access to all transfer history on customers’ account. Customers do not need to wonder

whether a cheque has cleared or a deposit has been posted. At the click of a button, customers

can easily check the status of their current, savings and any other type of account. Also,

Customers do not have to wait till month end for historical, snail mail statements of account,

through online banking: banks can provide immediate account enquiries statements online for

customers. Furthermore, e-banking gives the ability to pay bills electronically. Since banks tie-up

with various companies, services providers, and insurance companies across the country, a

customer can facilitate payment of electricity and telephone bills, online registration, scratch card

of universities and insurance premium bills. Customers can also transfer any amount from one

account to another account of the same bank or another bank. Geographical locations are no

longer barriers to financial transactions

2.1.2 Automated Teller Machine And Automated Banking In Nigeria

The ATM is perhaps the most popular of all products of e-banking in Nigeria. However, just like

every other product of this system, it has its own guidelines. A cursory look at its guidelines

exposes some legal issues which are worthy of consideration. The standard of operation provided

by the guideline provides that all ATMs are to dispense all denominations of Naira, but the

penalty section of the guideline is not clear enough. More often than not, lower denominations of

Naira are not dispensed by this machine and this has a consequence on the larger society.

Scarcity of lower denomination of naira can be traced to the lack of compliance of this standard

by most financial institution operatives.

Financial institution operatives must consider the visually impaired persons in its ATM facilities

as contained in the guideline. However, often times this is neglected, thereby leaving a section of

the society uncovered in this regard.

The guidelines also stipulate that bank ATMs should not discriminate ATM cards. However,

there are no laid down procedures to enforce this guideline. The only closely related procedure is

that which allows the CBN to conduct onsite checks of ATMs with a view to ensuring

compliance of these guidelines. Also, ATM standard downtime is 72hours consecutively. Where

this is not practicable, customers ought to be duly informed. ATMs ought not to be stocked with

unfit notes, and cash ought to be statutorily available in the ATMs at ALL time. These guidelines

are sometimes not followed.

Every ATM is to have a camera which is mandatory to record all users of the ATMs without

their key strokes. This is in no way a violation of any privacy as a matter of fact, where the user

of an ATM blocks his image for camera capture, the ATM shall be capable of aborting the

transaction.

Nigeria runs a cash out first before card is out of ATM, to minimize the possibility of customers

leaving cash uncollected at ATM.

2.1.3 Point Of Sales Machines And Automated Banking In Nigeria

This has over the years gained popularity due to its wide range of usage by traders, retailers and

wholesalers, businesspeople, etc. However, a cursory look at its guidelines exposes some issues

for examination.
Under the guideline, the common retailers and wholesalers of POS are called the merchants and

they are enabled to enter into agreement with only a merchant acquirer licensed by CBN.

The merchant shall be held liable for frauds with the card arising from its negligence, connivance

etc. However, the cardholder shall be liable for fraud committed with his card, arising from the

misuse of his PIN or his card. He must also protect his card, mobile device and PIN with due

care or inform the issuer immediately a PIN is compromised. Timely notify the issuer about

missing, stolen, damaged, lost or destroyed card and/ or mobile device.

Same also applies to the mobile POS as provided in its guidelines.

2.1.4 Web Pay Transactions And Automated Banking In Nigeria

A lot of initiatives tried, on the one hand, to apprehend these various systems, and on the other

hand, to compare them. In order to be able to analyze these systems, it is of primary importance

to present their features and especially to establish a typology. Before exposing typologies and

features of electronic payment systems, a brief definition of an electronic payment system is

essential because, in the literature, the term “electronic payment system” (e-payment system) is

used often with senses very different.

Web payment systems permit to “transfer funds without restriction, nor definition as for the

support or to the technology used for this purpose” (Yuan, 2003). They consist “of the

instructions to transfer value bundled together with the communications system” (Kuttner and

McAndrews, 2001). These systems introduced thus far generally fall into a special category.

However, with the evolution of Internet, the development of cryptography and the emergence of

several kinds of payment solutions, other classifications have come. First, we note the study of
Havinga and alii (1996) which distinguishes between systems based on traditional means of

payment, especially bank cards, virtual money and credit-debit systems based on virtual

accounts. Then, in 1997, Wayner introduces a new more practical typology by keeping the

category of “virtual money based systems” (presented previously by Medvinsky and Neuman

(1993) and Havinga and alii (1996)) and distinguishing the category of “account based systems”.

Asokan and alii (1997) proposed also another typology based on the flows exchanged between

the payer and the paid. After that, a second wave of classification will follow, we noted the

researches of Kuttner & McAndrews (2001), Abrazhevich (2001) and Stroborn and alii (2004).

The analysis of all these works carried out us to conclude that electronic payment system thus far

generally fall into one of two major families: those based on accounts and those based on

electronic money. OECD (2000) proposed this classification too. Nevertheless, the contribution

of the present article is to detail these two families of systems. Indeed, we were able to identify

several categories constituting each family based on their operational principle. Thus, our

approach reveals two levels in classification of electronic payment systems. So, we keep the

first level of classification that distinct between of “account-based systems” and “electronic

money based systems”. In the second level, for the first family, we brought together payment

systems in five main categories: smart card based systems, electronic checks, email payments,

other electronic systems for micro payment, and mobile payments. For the second family, we

distinguish between electronic wallet, virtual wallet and virtual money. The following scheme

summarizes web pay transaction (electronic payment system).

 Account-based Systems
Credit and debit card payment with the SSL (Secure Socket Layer) protocol is the most common

way of paying on the Internet. An SSL-based transaction assures the encryption and integrity of

a transferred message. Merchants can use it in two ways: with or without an intermediary. The

version without intermediary (SSLWI) assures message encryption and integrity but exposes both

parties to other risks. As a customer communicates their card number and expiry date directly to

a merchant, the card number can be illegally used. Moreover, the existence of the merchant is not

ensured. The vendor in turn does not have a guarantee that the buyer exists and that they will not

repudiate the purchase afterwards. The version with an intermediary (SSLI) assumes the

participation of a third trusted party, which guarantees the existence of the vendor as well as

denying them access to the buyer’s card data. It increases security on the customer’s side,

assuring them of the merchant’s authentication and data confidentiality. Nonetheless, the latter is

still not able to identify the buyer. This asymmetry can be eliminated by integrating an electronic

signature system into the technology. The electronic signature allows the authentication of the

buyer. However, such a solution requires the buyer to have a card reader (CyberCOMM) or an

electronic certificate (SET: Secure Electronic Transaction), which, because it involves additional

costs, would have more difficulty in achieving a sufficient market acceptance. Due to the failure

of SET, Visa decided to develop the payment protocol 3D Secure, which was inspired by SET

but makes it much less constraining for merchants (installation of a plug in software only).

 Electronic Money based Systems

At the outset, electronic money included three types of payment systems: electronic wallets,

virtual wallets and virtual money. Electronic and virtual wallets first require money to be

deposited with the manager of the payment system, by various traditional means of payment.
Electronic wallets are based on smart card technology, which is used to store data about the

customer's funds. Cash is loaded into the e-wallet by a transfer from the cardholder's account. In

this way, banks are not involved in the transaction at the moment of purchase. E-wallets mainly

target the micro-payment market. At present, they can be used at points of sale, vending

machines, parking meters, ticket machines, public payphones, and set-top boxes for interactive

TV, etc. The integration of this system into Internet payments requires a smart card reader on the

customer’s side. The simplest and most realistic way to achieve this is to build readers into mobile

phones. Such a solution can accelerate the development of pay-per-use services, such as online

games, music, ticketing or mass transit systems. Systems based on the virtual wallet are quite

similar to those based on electronic wallets. The only difference is that cash is stocked on the

software instead of on a smart card. After having created an account at the system issuer, the

buyer only has to enter their ID and password at the moment of transaction. The virtual wallet is

used for macro and micro-payments via the Internet. Virtual money, like Cyberbuck (Digicash)

or Beenz, were pure electronic currencies. The consumer buys coins from the provider of this

sort ofmoney and stores them on his hard drive. Each coin is protected by an encrypted number

and an encoded signature, in order to avoid unauthorized duplication or counterfeiting. The shape

of this sort of money is not very different from the money included in virtual wallets. But the

principles are different because it is not necessary to deposit money before receiving electronic

money and there is no official exchange rate for it, as with an official currency like the US dollar.

2.1.5 Bank Performance

The performance of a company is a measure or indicator of whether a company can be said to be

able to work well or not. In the performance systematics itself, there are many separate factors
and indicators whether the company is said to be healthy or not so that many companies are

active in analyzing, evaluating, and arranging strategies in the hope of improving the company's

performance. The same is the case with the banking sector. The bank itself makes the

performance of a bank an indicator of whether the bank is healthy or not which is measured

within a certain maturity or period. Assessment of a company's financial performance is one way

that management can do to fulfill its obligations to funders and to achieve the goals set by the

company. Bank financial performance is a description of the bank's financial condition in a

certain period, both in terms of raising funds and channeling funds, which are usually measured

by indicators of capital adequacy, liquidity, and bank profitability.

According to Rose bank performance has two indicators, namely quality, and quantity, while the

dimensions of bank performance are the dimensions of profitability and risk. Jalal also explains

again that the measures used as a proxy for profitability are RoA (Return on Assets) and RoE

(Return on Equity), while in the risk dimension the measures used as a proxy are LDR (Loans to

Deposit Ratio) and CAR (Capital). Adequacy Ratio).

RoE (Return on Equity) according to Gitman and Zutter is a measurement of the return obtained

on the investment of ordinary shareholders in the company. Meanwhile, RoE (Return on Equity)

according to Taswan is a ratio that measures a company's ability to generate net income from its

equity capital. External factors that affect the performance of a bank are from a macroeconomic

perspective. Macroeconomics is the study of economics that deals with the broader economy.

Because of its broad scope, macroeconomics often discusses the economy in a state and even its

relationship with one country to another, both nationally and internationally.

2.2 Theoretical Framework

Automated Banking Bank Prformance

Web pay transaction Net profits

ATM Return of assets

POS Staff effectiveness

2.3 Empirical Review

Annual data of 22 deposit money banks in Nigeria covering from 2009 to 2019 and the ordinary

least square (OLS) method was employed by Okonkwo and Ekwueme in analysing how the use

of automated teller machine (ATM), point of sale (POS) and firm size affecting return on assets,

the proxy of banks’ performance. The result showed that increased use of ATM and POS

reduced banks’ performance, but only insignificantly. For Mohmmed, Ibrahim and Muritala,

who used the autoregressive distributed lag (ARDL) method and quarterly data from 2007Q1 to

2020Q4, the use of POS, internet payment and mobile payment caused growth in return of assets

of banks in Nigeria. They noted that use of real-time gross settlement (RTGS) insignificantly

reduced return on assets.

Arilesere, Olaleye, Asaolu and Akienabor studied 21 deposit money banks in Nigeria using

quarterly data from 2009 to 2020 to examine how electronic payment techniques affect their

performance. Measuring performance using return on asset, the ordinary least square (OLS)

result revealed that mobile banking and automated teller machine significantly contribute to bank

performance. Debit cards was found to significantly reduce bank performance, while evidence

suggest that internet banking enhances performance but only insignificantly.

Demaki, Eromafuru and Imasuen used descriptive and inferential method to examine if

electronic banking predicts bank performance. Nigerian quarterly bank data from 2009 to

2019and inferential methods like cointegration and error correction model was used. From

regressing return on asset on electronic payment medium, it was revealed that point of sales

(POS), mobile banking and automated teller machine (ATM) significantly affect bank

performance. Only internet banking was reported to have insignificant influence. Analysis

revealed mobile banking, internet banking and ATM as having positive impact, while POS

generated negative impact.

Lawrence and Onazi used the ordinary least square (OLS) method and data from 2011 to 2017

to analyse the type of relationship existing between electronic payment and performance of

banks. While using profit after tax as measure of financial performance, the regression result

revealed that mobile banking and automated teller machine usage as means of payment

significantly enhanced bank performance. Increased usage of point of sale and online banking

caused decline in bank profitability. From the result, only online banking had significant effect.

While examining how digital financial services of thirteen banks in Nigeria affect their

performance, Isa-Olatinwo, Uwaleke and Ibrahim [5] employed a panel approach to

investigating how automated teller machine (ATM) and point of sale (POS) affect earnings per

share of the 13 banks. The cointegration and fixed effect methods were used and estimation

result showed that both POS and ATM are significant drivers of banking performance.