The Direct Banking Innovation (Die Direktbankinnovation)

Since 1994, the German banking market is confronted with an entry wave of direct banks. This banking innovation may be explained by developments on the supply side as well as on the demand side. It is pushed by developments in telecommunication technologies during a period of rising cost competition and pulled by a change in demand for selling efforts by banks. Within a model of monopolistic competition with endogenous selling efforts we show that in the long run, a direct banking market supports a larger number of firms which offer their products at lower prices than a branch banking market. As long as customers are heterogeneous, both banking types will survive. In the German banking market, however, the intensity of competition is so high that no direct bank has reached its break-even point yet