01-05-2012, 10:14 AM
INTERNET BANKING: DISRUPTIVE OR SUSTAINING TECHNOLOGY
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INTRODUCTION
It took Citibank 25 years to establish a global presence and Unofirst
would do this in a fraction of the time.1
The rise of the Internet has fueled the question across many industries of whether it is a
disruptive technology or just another distribution channel. With the rise of Internet
banking, the local, regional and global banking industries now face this question, too.
The Internet does seem to have some characteristics of a disruptive technology in the
banking industry; it has the ability to create major new growth in the industry [it]
penetrate[s], by allowing less-skilled and less affluent people to do things done only by
expensive specialists in centralized, inconvenient locations,and it offers consumers
products that are cheaper, better, and more convenient than ever before.2 However,
other people see the Internet as just another sustaining technology in banking, providing a
new, more convenient distribution channel, like ATM did when first introduced.
First, this paper will try to shed light on the concept of Internet Banking. It will then
analyze the rise of the Internet banking in Latin America. Next, it will offer and analysis
of global Internet banking. Finally it will arrive (hopefully) at a answer to this critical
question facing todays banking industry.
1 Gerhard Huber, CEO of Unofirst Group, quoted in Internet Banking Unofirst Launch Targets Internet
Customers, The Banker Financial Times Business Limited, 1 April 2000.
2 Christensen Clay, The Innovators Dilemma, HBS Publishing, 1997.
4
INTERNET BANKING: DEFINITION, SEGMENTATION, ADVANTAGES AND
RISKS
Definition
The terms PC banking, online banking, Internet banking, and mobile banking
refer to a number of ways in which customers can access their banks without having to be
physically present at a bank branch.3 PC Banking relates to every banking business
transacted from a customers PC. This can be done through online banking, in which
bank transactions are conducted within a closed network, or via Internet banking,
which permits the customer to perform transactions from any terminal with access to the
Internet. Mobile banking is the implementation of banking and trading transactions
using an Internet-enabled wireless device (mobile phones, PDAs, handheld computers,
etc.).4 Thus mobile banking (m-banking) is a subset of Internet banking (I-banking).
Segmentation
Internet banking is thus a remote delivery channel for banking services. These services
can be as simple as opening a deposit account or transferring funds, but can also include
more complex transactions like electronic bill presentments and payments, and the sale of
financial products, like insurance and brokerage.
The extent of services offered by an Internet bank depends largely on its size. A 1999
study of Internet banks by the U.S Office of the Comptroller of the Currency showed that
3 Electronic banking from a prudential supervisory perspective, Deutsche Bundesbank Monthly report
December 2000.
4 Equity research: E-Banking/M-Banking Openheim Research, January 2001 available at
www.openheim.de
5
while most Internet banks allowed services like balance inquiries, fund transfers between
accounts and bill payments, larger banks are much more likely to have online brokerage,
fiduciary and insurance services business lines.5 All Internet banks, small and large, were
roughly equally likely to offer cash management services. (See Exhibit 1.)
Exhibit 1 Key services offered by Internet National Banks6
All
Internet
Banks
< $100
million in
assets
$.1 to $1
billion in
assets
$ 1 billion to
< $ 10 billion
$ 10 billion
and over
Balance inquiry
and fund transfer
88.8% 74.1% 90.2% 94.5% 100.0%
Bill payment 78.2% 60.0% 77.4% 90.4% 100.0%
Credit applications 60.0% 51.8% 51.7% 75.3% 80.5%
New Account set-up 36.6% 29.8% 43.9% 45.2% 43.9%
Brokerage 21.6% 10.6% 14.7% 41. 1% 53.7%
Cash management 15.7% 14.1% 16.2% 15.1% 17.1%
Fiduciary 11.9% 3.5% 9.8% 12.3% 41.5%
Bill presentment 10.6% 7.1% 7.9% 16.4% 24.4%
Insurance 5.4% 2.4% 2.3% 6.8% 29.3%
Basic 77.6% 56.5% 77.4% 90.4% 100.0%
Premium 23.9% 14.1% 17.0% 41.1% 58.5%
Source: Office of the Comptroller of the Currency.7
5 Karen Frust, William Lang, and Nolle Daniel. Internet Banking: Development and Prospects Office of
the Comptroller of the Currency, Economic and Policy Analysis, Working Paper 2000-9, September 2000.
6 Karen Frust, William Lang, and Nolle Daniel. Internet Banking: Development and Prospects Office of
the Comptroller of the Currency, Economic and Policy Analysis, Working Paper 2000-9, September 2000.
6
The Internet banking industry is segmented in two types of banks, multi-channel banks
and pure Internet banks. While multi-channel banks have both offline and online
presences, pure Internet banks rely on their website for client interaction.8
The following sections will more deeply analyze the U.S. Internet banking industry. One
should be mindful of the fact that, according to a SalmonSmithBarney report, the U.S.
market offers an interesting perspective on what the future might bring for Latin
America.9 Hence, Internet banking in the U.S. provides a reasonable benchmark to
compare emerging market Internet banking development.
7 Karen Frust, William Lang, and Nolle Daniel. Internet Banking: Development and Prospects Office of
the Comptroller of the Currency, Economic and Policy Analysis, Working Paper 2000-9, September 2000.
8 Jupiter Communications Online Bankers: Differences Between Multi-channel Bankers and Internet-Only
Bankers, Vision Report, Volume/3, 5 February 2001. Available at www.jup.com.
9 SalmonSmithBarney, E-Banking in Latin America, March 20, 2000.
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Exhibit 2: Types of Internet banking sites in the USA
A Jupiter Communications report, Online Bankers Difference Between Multi-Channel
Bankers And Internet-Only Bankers,10 compared website visits between March and
November 2000 of multi-channel banks Citibank and Wells Fargo, and pure Internet
banks CompuBank and NetBank. The most important findings were:
! First
• Multi-channel banks dominated but pure Internet banking were increasing
dramatically;
• The multi-channel bankers increased by 101 percent in this period compared to an
increase of 230 percent for the pure Internet bankers;
• Multi-channel banks continued to draw the highest traffic due to their off-line
channels, brand awareness, and existing customer base, and had higher customer
conversion rates.
Exhibit 3 Account Holders and Conversion Rates, March-November 200011
10 Jupiter Communications Online Bankers: Differences Between Multi-channel Bankers and Internet-
Only Bankers, Vision Report, Volume/3, 5 February 2001. Available at www.jup.com.
11 Jupiter Communications Online Bankers: Differences Between Multi-channel Bankers and Internet-
Only Bankers, Vision Report, Volume/3, 5 February 2001. Available at www.jup.com.
8
Source: Media Metrix, © 2001 Jupiter Media Metrix Inc.
! Second
• Pure Internet bankers showed slightly higher loyalty rates than their multi-channel
counterparts. While 84 percent of Internet bankers had only one banking
relationship, only 79 percent of multi-channel bankers had one relationship.
Exhibit 4 Account Holders and Conversion Rates, March-November 2000
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Source: Media Metrix, © 2001 Jupiter Media Metrix Inc
! Third
• There was high cross visitation among pure Internet banks. Thus, their online
acquisition strategy, is posing a concern for the multi-channel banks.
• In November 2000 nearly one out of five Citibank account holders comparison
window shopped at CompuBank.
Exhibit 5: Percentage of Each Bank's Traffic to Each Other, November 2000
Source: Media Metrix, © 2001 Jupiter Media Metrix Inc
! Fourth
• Pure Internet only bankers are more youthful than the multi-channel bankers.
• Forty-four percent of pure Internet bankers were 35 and younger, compared to
30% of the multi-channel bankers.
10
Exhibit 6: Online Bankers by Age Across Jx Frequency Band, November 2000
Source: Media Metrix, © 2001 Jupiter Media Metrix Inc
! Fifth
• Yahoo! and MSN dominated the origin and destination of online bankers.
• Quite often, online bankers start their online activities at a major portal, thus
begging the question, Will the portals become banks?