The Effect of Heterogeneous Risk on the Adoption of Remote Banking Technologies Keldon J. Bauer Illinois State University Scott E. Hein Texas Tech University
Introduction • Bankers are adopting remote banking technologies for two primary reasons: • It enhances their competitiveness. • Customers can access their account anytime/place. • Customers can be served further from the bank. • Hannan and McDowell (1990) ATMs. • Bouckaert and Degryse (1995), and Degryse (1996) Phone-banking, and remote banking in general.
Introduction 2. They hope to reduce costs. • Technology in general has improved the cost structure of banks. • Daniel, Longbrake and Murphy (1973). • Hunter and Timme (1986, 1991). • Humphrey and Pulley (1997). • Wheelock and Wilson (1999). • With remote banking technologies, successful adoption means customers must also adopt. • What are the important variables to the customer?
Theory • We assume that the customer derives utility from having a bank account, designated f(x). • We assume that adding a remote access technology to the account adds utility to the overall function, designated dihi(x). • The “i”s represent different remote banking technologies. • d is an indicator variable.
Theory Under Certainty: Under Uncertainty: or where
The Optimal Configuration • The f(x) is the cost of the base bank account. • The gi(x) represents the cost of the ith added remote access.
Theory • From the consumer’s perspective adoption depends on three things: • Added utility offered – the more utility the more likely they will adopt. • Marginal cost to the consumer – the cheaper the more likely they will adopt. • The risk premium. • A function of subjective probability, and utility from remote banking technology.
Data • We used the 1998 and 2001 Surveys of Consumer Finance (SCF). • To proxy for utility: • # of checking accounts, • # of savings accounts, • $ amount in those accounts.
Data • To proxy for risk premium: • Risk aversion variable. • Take substantial financial risks expecting to earn substantial returns. • Take above average financial risks expecting to earn above average returns. • Take average financial risks expecting to earn average returns. • Not willing to take any financial risks.
Data • To proxy for budget constraint: • Age (of head of household), • Log of Income (household), • Education (a series of dummy variables), • Using other forms of internet financial management.
Data • Interaction with budget variables. • There are two reasons why there might be interaction between risk aversion and budget constraint variables. • In the adoption decision, the risk aversion variable only captures the shape of the utility function, not the budget constraint as well. • Most of these variables also might capture heterogeneous risk assessment.
Methodology • Base Adoption Logit Model:
Methodology • Conditional Logit is Based on the following Multinomial Logit:
Methodology • Conditional Logit:
Table 2 - Conditional Logit P(Internet|Phone Banking)
Table 3 - Conditional Logit P(Phone Banking|Internet)
Conclusions • Risk perception is not homogeneous. • If the new technology is relatively new, a familiar technology should be offered as a parallel remote access choice until the consumer is comfortable with the new technology. • Any market expansion (defense) is short-lived, since the subjective risk assessment disappears quickly.