Internet Banking in the U.S : Landscape, Prospects, Industry Implications

Internet banking is 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 in the U.S. and discusses its implications for the banking industry.Even though only a small number of banks were offering Internet banking at the end of 2000, analysis of data collected from Office of the Comptroller of the Currency bank examiners shows that this will change significantly in 2001, with over 50% of banks offering Internet banking services. As a group, large banks are found to be 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. 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 value-added proposition. A more compelling case can be made for Internet banking adding value for banks' business customers, and this may explain why some banks are now targeting their Internet strategies toward business customers. Nevertheless, because an overwhelming number of consumers currently have accounts at banks that offer Internet banking, consumer usage patterns could change suddenly. In addition to affecting the way customers receive banking services, Internet banking may become an important influence on banking industry structure. However, the effect of Internet banking 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