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Criticism

The cost model developed in this section is limited to investigating and determining
transaction costs for a chosen area and for specific transactions only. Conclusions about
the amount of a reduction cannot be automatically transferred to other situations, and
there are several premises constraining its explanatory power. Furthermore, the utilized
scope of “transaction costs” involves monetarily measurable parts as well as non-
monetary components. As the deduction of reductions of transaction costs has been
conducted by the verbal description of processes, these steps may not be easy to
comprehend, nor unambiguous. As a matter of fact, two major weaknesses of any scoring
model are the assigned weights which can hardly be objectified and the compensatory
effects which may result from adding up all part values. Nevertheless, these aspects
apply for all different modes of transaction that have been investigated in this context.
Consequently, the scoring model enables comparative analysis to be carried out for
different modes of coordination. Changing the assigned values in a reasonable way
neither affects the general assessment of a single transaction in a significant way nor
does it have an impact on the general conclusions derived.




Empirical Considerations
Transaction costs have been surveyed indirectly in the cost model by comparing
different institutional designs. A similar approach will be taken in this section. Due to
the lack of data concerning the number and the volume of transactions actually
accomplished, further investigations will focus on the analysis of potential transactions
in most areas. Therefore, infrastructure facilities and institutional as well as technical
requirements will be reviewed for Germany.
The diffusion rates of certain underlying technologies which are necessary for electronic
transactions will give an idea of the resulting potential relative reductions of transaction
costs. Several regression models will be introduced and used to describe actual trends
and developments. The coefficient of determination (r2) serves as a measure to test the
quality of the applied model.
With regard to the banking sector, it is important to note that there has been a permanent
decrease in the number of commercial banks and branch offices in Germany over the last
twenty years (Figures 1 and 2).
From 1990 (4,711 institutions) to 2001 (2,696 institutions) there has been a decrease in the
number of commercial banks of about 42%. The regression model for this period predicts
2,087 institutions in 2010:


f(x)= -107,736x + 218635,905 and r2=0.9344




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Reduction of Transaction Costs by Using E-Commerce in Financial Services 73


Figure 1. Number of commercial banks in Figure 2. Regression models for the
Germany, 1980-2001 number of commercial banks in Germany,
1980-2001
Number of commercial banks




Number of commercial banks
year year




As shown in Figure 3 and 4, for this reason the number of inhabitants per commercial bank
has steadily increased (from 1,375 inhabitants in 1981 to 1,880 inhabitants in 2001).
Using the regression model for the period from 1993 to 2001, this number will have reached
2,199 by 2010:


f(x)= 41.517x-81249.894 and r2=0.9252



Figure 4. Regression model for the
Figure 3. Development of inhabitants
development of inhabitants per
per commercial bank in Germany, 1980-
commercial bank in Germany, 1980-2001
2001
Inhabitant per commercial bank
Inhabitant per commercial bank




year year




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74 Pfahler & Grebe


Figure 5. Development of telephone Figure 6. Personal computers per
mainlines in Germany, 1980-2001 Internet User in Germany, 1991-2001
Telephone mainlines (per 100 inhabitants)




Personal Computer/ Internet-User
year
year



Another indicator for the emergence of new technologies and the use of electronic
commerce is the number of telephone mainlines per inhabitant. These are required for
transactions via phone or fax and can be used to access the Internet. The number has
increased from 26 in 1980 to 61 in 2000 (Figure 5).


f(x)= 1.779x -3499 and r2=0.9812


The number of Internet users in Germany has grown from 0.3% in 1991 to more than 36%
in 2000. Today, more than one third of the population browses the net regularly or at least
from time to time. This fact and the enormous growth rate create a considerable potential
of customers which may accomplish bank transfers and stock purchases in the future.
The development of the number of personal computers per 100 inhabitants in Germany
since 1990 can be approximated by another linear regression model:


f(x)= 0.1398x -276,1 and r2=0.9877


A comparison between these data and the number of people browsing the Net may be
even more interesting. Figure 6 relates the number of available personal computers to the
number of Internet users. The latter increases much faster because not every single
Internet user owns a personal computer, several individuals can use one device to get
access to the Internet, and it is now possible to be connected via PDA (personal digital
assistant) or mobile phone, which are commonly used. The increase of mobile phones per
100 inhabitants in Germany can be approximated by the following regression model:


f(x)=0.45405x-904.25649 and r2=0.9863


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Reduction of Transaction Costs by Using E-Commerce in Financial Services 75


Figure 7. Number of online accounts in Figure 8. Regression model for the number
Germany, 1995-2001 of online accounts in Germany, 1995-2001




Online-Accounts (in millions) [log]
Online-Accounts (in millions)




year year



The number of online accounts has been increasing considerably over the past years as
the cost model has predicted (Figures 7 and 8). As bank transfers are highly standardized
and common transactions, they are processed via new media more and more often:


f(x)=0.47462x-946.55059 and r2=0.9766


Figure 9 displays the development of German security accounts. Figures on how these
accounts are administered have not been available. Since 1995, the number has increased
from about 16 million to 34 million. As the value of r2 indicates, the regression model does



Figure 9. Number of security accounts in Germany, 1995-2000
Security Accounts (in millions)




year



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76 Pfahler & Grebe


not describe current developments very well in this case, but the figures definitely reveal
an increasing interest in stocks and in the capital market. Most of the newly established
accounts are probably governed online or by using mobile devices:


f(x)=0.14315x-282.88639 and r2=0.8686




Future Trends
The increasing use of information and communication technology as the most important
requirement for electronic commerce has been documented in the last section. Most of
the predictions and hypotheses which could be derived from the cost model have been
tested, at least for Germany.
It has been pointed out that the banking sector is facing dramatic changes and that the
required infrastructure is constantly being improved. More and more individuals are
utilizing information and communication technology to change their way of executing
transactions”in financial services as well as in other economic areas. At present it is
possible to realize relative reductions of transaction costs of 89% by using online
banking instead of accomplishing a bank transfer in a traditional way, and to realize a
reduction of 83% by switching to online brokerage for stock purchases. Transaction
costs which commonly arise from the interface between a financial institution and its
customers are crucial. But the success of a new mode of transaction does not solely
depend on reductions of transaction costs: The diffusion rate of the underlying


Figure 10. Four quadrant scheme for the classification of present and future impacts
of electronic commerce on financial services




Manual Transaction
Transaction via telephone
Diffusion Rate of the Underlying Technology




Postal Transaction Online Transaction

Transaction via Fax
Mobile Transaction




Transaction via BTX




Relative Reduction of Transaction Costs




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Reduction of Transaction Costs by Using E-Commerce in Financial Services 77


technology is another key aspect. To enable further predictions of sectoral trends and
tendencies, all modes of coordination referred to are finally classified in a four-quadrant
scheme to illustrate present and future impacts of electronic commerce on financial
services (Figure 10).
Postal transactions and transactions via fax are inferior to other modes and will soon be
negligible. In Germany, BTX has already merged with online and Internet services.
Manual transactions will decrease, but they will still remain very commonly executed.
Until new modes of transacting are developed and accepted, online and mobile transac-
tions will continue to dominate other forms in this sector and gain even more importance.
Referring again to the famous study by North and Wallis (1986), it should be underlined
that transaction costs are of extreme importance nowadays and that they have been
increasing significantly over the last decades. This applies to a national economy as a
whole as well as to specific economic areas. The increase originates from the growing
complexity of business processes and transactions, the high level of the division of
labour and the growing number of possibilities to act and to interact in general. By using
Electronic Commerce instead of the so-called “traditional ways” of interaction, these
costs can be reduced and limited to a great extent, depending on the specific mode of
coordination. In the future, reductions of transactions costs will be made possible by the
spread and the use of new technologies and modern communication and information
facilities, i.e., by the development and the extension of an adequate technological
infrastructure. However, it will have to be an issue of further investigation to what extent
these costs can be reduced and in which areas new transaction costs will arise.
Differences in the development of certain countries and of specific sectors will then help
to illustrate and to understand the complex impacts of ICT.




Conclusions
The model developed in this chapter intends to explain how transaction costs can be
reduced by the use of electronic commerce and its underlying technologies. Its academic
background is the Theory of New Institutional Economics. Quantifying these costs and
the potential reductions of transaction costs in an absolute way has not been possible
in this context. Nevertheless, by comparing alternative institutional methods (Williamson,
1985) of accomplishing the same transaction, the model is able to illustrate specific trends
and general tendencies in the banking sector under certain premises. At present,
transactions which are accomplished by using mobile devices lead to a maximal relative
reduction of transaction costs, and newer modes of transacting dominate traditional
methods from this particular point of view. Some of these older forms have already been
discontinued whereas others may not disappear completely from business life. But
provided that all individual participants act in a rational way, they should lose more and
more of their former importance.
Hopefully, new quantitative as well as qualitative indicators will be developed in the
future to assess the emergence and the amount of transaction costs in a national economy
as well as for specific enquiries. For this purpose, information and communication


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78 Pfahler & Grebe


technology itself should contribute to a significant extent by making it possible to
acquire, process and analyse relevant data.




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