Internet Banking

Internet Banking:

Market Developments and Regulatory Issues May 2001 (Revised) John Carlson, Karen Furst, William W. Lang, and Daniel E. Nolle* Office of the Comptroller of the Currency presented to Society of Government Economists Conference 2000 The New Economy: What Has Changed, and the Challenges for Economic Policy Nov. 17, 2000, Washington, DC. *The opinions expressed in this article are those of the authors alone, and do not necessarily represent those of the Office of the Comptroller of the Currency or the United States Treasury Department. Contact author: Daniel Nolle at daniel.nolle[at]occ.treas.gov. 1 Internet Banking: Market Developments and Regulatory Issues Abstract Internet banking is a subject receiving great attention in the banking industry and the regulatory community. As with other areas of e-commerce, discussions about Internet banking often proceed without reference to the actual state of market developments. This paper describes the current state of Internet banking and discusses its implications for the banking industry and regulatory policy. At the end of 2000, a minority of banks offered Internet banking, but analysis of data collected by Office of the Comptroller of the Currency bank examiners shows that over half of all banks will offer Internet banking by year-end 2001. As a group, large banks are more likely to offer Internet banking, although a growing number of small banks offer it, or plan to. Nevertheless, large banks appear to have an advantage over small banks in the range of services they offer over the Internet. An empirical examination of bank profitability indicates that, at this point in time, Internet banking is not having an independent impact on bank profitability. This result may of course change as the use of Internet banking grows. Use of Internet banking, while forecast to grow significantly, is still relatively modest. We argue that the modest use of Internet banking by consumer customers of banks is due in large part to a lack of a compelling valueadded proposition. This problem is less severe for Internet banking customers and may explain why some banks are targeting their Internet strategies toward business customers. Nevertheless, since most consumers have accounts at banks that offer Internet banking, consumer usage patterns could change suddenly. Internet banking’s impact on consolidation in the banking industry is uncertain. The economics of Internet banking may favor large institutions, either because of economies of scale and scope, or because of the need to advertise heavily to be successful. Alternatively, Internet banking could offer entry and expansion opportunities that small banks traditionally lacked. Internet banking presents policy makers and regulatory authorities with a set of significant challenges. Changes to the structure and functioning of financial institutions are challenging a regulatory structure that was developed based on increasingly outdated lines of demarcation among types of financial institutions. In addition, existing regulatory policies have to be adapted to the new realities of e-commerce as Internet banking accentuates or lessens various existing public policy concerns, and in some cases, raises entirely new concerns. Finally, traditional methods of safety and soundness supervision must adapt to the changing nature and scope of risks, and the possible creation of new types of risks for banks.

2 I. Introduction


Internet banking is a subject receiving great attention in the banking industry and the regulatory community. To some extent, the intense interest in Internet banking reflects a more general interest in the role of the Internet as a vehicle for commercial activity. However, interest in Internet banking may be particularly keen since a strong case can be made that banking, along with other financial services, provides a particularly fertile environment for the development of e-commerce. At its core, banking involves the collection, storage, transfer and processing of information assets, and the Internet is an incredibly powerful and efficient tool for handling these information processes. Some analysts argue that Internet banking is revolutionizing the banking industry. Others see the Internet as simply adding another delivery channel for remote banking to existing channels such as automated teller machines (ATMs) and telephone banking. As with other areas of e-commerce, discussions about Internet banking often proceed without reference to the actual state of market developments. While Internet banking is the subject of a large amount of industry discussion, it remains the case that only a small percentage of banking transactions are done online, and only about a third of all banks currently offer Internet banking. Nevertheless, the adoption of Internet banking by banks has grown at a very rapid pace, and many banks, including some of the nation’s largest institutions, have made the development of services over the Internet a major component of their business and marketing strategy. The purpose of this paper is to describe the current state of Internet banking and to discuss its implications for the banking industry and regulatory policy. The next three sections provide information on Internet banking market developments. Section II describes the Internet banking “landscape” in the United States, drawing heavily on information collected by Office of 3 the Comptroller of the Currency (OCC) national bank examiners. Section III explores whether Internet banking has had a noticeable impact on bank performance. Our regression analysis indicates that, so far, Internet banking has not had a significant impact on bank profitability. Section IV summarizes information collected by OCC examiners on the Internet banking plans of national banks, and briefly considers industry estimates of potential “demand” for Internet banking. Section V turns to implications Internet banking may have for banking industry structure, and for bank regulation and supervision


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http://occ.treas.gov/netbank/ibneweconomy.pdf