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Business Services Industry

Internet banking in the U.S., Japan and Europe

Multinational Business Review, Fall 2002 by Pyun, Chong Soo, Scruggs, Les, Nam, Kiseok

Information technology is fundamentally changing the banking industry worldwide, altering traditional definitions of product, market and customer base. Internet banking has significantly reduced barriers to entry, accelerating financial disintermediation. Competitive impacts of e-- banking are more pronounced in the U.S., where non-bank financial service providers have made significant inroads into banks' traditional turf. Yet, U.S. banks are sitting on the sidelines, embracing online banking largely as a defensive strategy. Online banking in Japan has been largely confined to the domestic customer base. European banks have leveraged Internet banking for cross-border expansion, consolidation and competition. However, e-banking in the European Union with a single currency raises regulatory and technical issues.

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Businesses worldwide are being reinvented and reengineered with the advent of the World Wide Web. In particular, Internet technology is fundamentally changing the global banking industry, blurring the traditional lines that define product, market and customer base. Today, the click of the mouse empowers consumers with unprecedented freedom in choosing vendors for their financial service needs. Despite the bursting of the Nasdaq dot-com bubble, Internet banking is growing and maturing at home and abroad.

Banks perform a critical role in financial intermediation, and society benefits as banks bear risk in leveraging their liabilities, customer deposits. But the revolution in information processing has lowered entry cost, thereby increasing competition among banks, and competition between banks and other financial institutions, such as security brokers. The less efficient have been forced to merge and consolidate. In short, technology has fundamentally altered the creation, delivery, reception, and utilization of financial products, and advances in computing and telecommunication have eroded economic and regulatory barriers to competition, de facto (Greenspan 1997).

During the first half century of the information era, the U.S. dominated innovation and standardsetting in technology related to the Internet. However, when it comes to wireless technologies, Japanese and European companies are far ahead on the learning curve. According to Beck and Morrison (2001), penetration, use and integration of mobile phones into normal activities are much greater in Northern Europe than in the U.S. Europe leads in palm organizers and mobile web-browsers and perhaps in the innovations based on wireless information technology.

This paper is a progress report on the state of Internet retail banking in the U.S., Japan and Europe. Why have banks embraced cybertechnology? How have they responded in their e-commerce strategy? What regulatory issues arise from electronic and Internet banking in the European Union when national currencies convert into Euro?

The remainder of the paper is organized as follows. Section One (1) presents an overview of the effect of technology on Internet banking, while Section Two (2) discusses the current state of online consumer banking. Section Three (3) examines the e-bank strategies pursued by banks and non-bank financial service providers in the U.S., while Sections Four (4) and Five (5) discuss dominant e-bank strategies in Japan and Europe, respectively. Regulatory and payment system issues relevant to electronic and Internet banking in the European Union are described in Section Six (6). Summary remarks are found in the last section.

INTERNET REVOLUTION

The average consumer has accepted the Internet and e-commerce with phenomenal intensity and speed. According to Good (1998), electricity was invented in 1873, and it took 46 years for mass adoption of this technology throughout the world. It took 35 years for telephones, 22 years for radio and 16 years for PC's. For the World Wide Web, it has taken only 6 years.

As late as January 1998, only 770 banks in the U.S.-seven percent -offered online services. One year later, an estimated 4,990 banks were offering or planning to offer full service Internet banking. More significantly, over 65 percent of small- and medium- size community banks planned to introduce electronic banking to their customers (Nathan, 1999). Online customers account for more than 20 percent of the total, and growth is accelerating in the U.S. (Serif 2000,16).

In 1999,Internet banking sites numbered 1,845 in Germany, Belgium, Holland, Spain, United Kingdom, Italy and Ireland. Germany has the largest number of sites while France is the fastest growing market. The U.S. during this same period had only one third as many sites as these eight countries, even though the U.S. had an internet population more than twice that of all of Europe (Stewart-Allen 1999).

Several factors account for the fast growth in Internet banking in Europe and the U.S. First, PC and Internet banking have significantly reduced the barriers to entry in the banking industry in both continents. The accounting firm Booz, Allen and Hamilton estimates that it costs approximately $25 to $30 million to set up a traditional brick-and-mortar bank but only $6 million to set up an Internet bank in the U.S. Secondly, as e-commerce is rapidly accepted by businesses and consumers, bank customers have come to expect convenience and technical innovation in the services provided by their banks. Third, while Internet banking operations are not yet profitable to most banks, the cost of attracting and maintaining customers with online banking is so low that investments in electronic and Internet banking are irresistible to banks and non-bank financial institutions. According to a survey by Booz, Allen and Hamilton (Nathan 1999), an estimated cost of providing the routine business of a full service branch is $1.07 per transaction, as compared to 54 cents for telephone banking, 27 cents for ATM banking and a paltry one and one-half cents for Internet banking.

Business Services Industry

Internet banking in the U.S., Japan and Europe

Multinational Business Review, Fall 2002 by Pyun, Chong Soo, Scruggs, Les, Nam, Kiseok

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