Internet Banking : Developments and Prospects

This paper addresses significant gaps in existing knowledge about the Internet banking landscape. Using information drawn from a survey of national bank examiners, we find that while only 20 percent of national banks offered Internet banking in Q3 1999, these transactional Internet banks accounted for almost 90 percent of national banking system assets and 84 percent of the total number of small deposit accounts. All of the largest national banks offered Internet banking, but only about 7 percent of the smallest banks offered it. Among institutions offering Internet banking, large banks are more likely than small banks to offer a broad range of services on the Internet. Matching call report data to the examiner survey information, we also find that banks in all size categories offering Internet banking tend to rely less on interest-yielding activities and deposits than do non-Internet banks, and institutions with Internet banking outperformed non-Internet banks in terms of profitability. Excepted from the superior performance of Internet banks versus non-Internet banks are de novo Internet banks, which were less profitable and less efficient than non-Internet de novos. Projections based on banks’ plans as of Q3 1999 indicate that 45 percent of all national banks will be offering Internet banking by the beginning of 2001. While most of the growth in new Internet banking will be due to small banks coming online, almost half of all national banks had no plans to offer Internet banking. Large banks have more aggressive plans to offer business Internet banking services in the future than small institutions. We develop logit models to explain why banks choose to adopt Internet banking, and why some choose to offer a relatively wider array of Internet banking products and services. Among the key factors explaining which banks have chosen to offer Internet banking are membership in a bank holding company, physical location of the bank in an urban area, relatively higher premises and other fixed expenses to net operating revenue, and higher noninterest income, and efficiency than non-Internet banks. More profitable banks were more likely to adopt Internet banking after Q2 1998, but more profitable institutions were less likely to be among the “first movers” i.e. banks adopting Internet banking as of Q2 1998. Among banks that offer Internet banking, larger banks and banks that offered the service for a longer time were significantly more likely to offer a wider range of services on the Internet. The views expressed in this paper are those of the authors alone, and do not necessarily reflect those of the Office of the Comptroller of the Currency or the Department of the Treasury. The authors wish to thank Bernard Locey for his help, Steve Egli for research assistance, and Frank Dwyer for editorial assistance. We also thank Gary Whalen, Bob DeYoung, Mark Flannery, and Jim Barth for insightful comments. Please address correspondence to Daniel E. Nolle, Senior Financial Economist, Policy Analysis Division, Office of the Comptroller of the Currency, 250 E. Street, S.W., Washington, DC 20219 (phone: 202-874-4442; e-mail: daniel.nolle@occ.treas.gov).