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Measuring Internet Banking's Impact on the Bottom Line
by Dr. Michele Petry, Editor, BankersOnline.com

Although dot.com companies may be languishing in a sea of red, the Internet continues to grow and expand. According to an study conducted by UCLA, a full two-thirds of Americans are online, with roughly 55,000 new users in the U.S. signing up for personal accounts each day. It's no wonder then that financial institutions, although traditionally slow to act, have heard the call, and are responding by offering Internet banking services to their customers.

Regardless of which type of financial institution charter you hold, the results of a study released by the Office of the Comprtoller of the Currency can provide you with valuable insight into the impact of Internet banking on an institution's bottom line. Released in September, 2000, the study reveals that virtually 100% of the financial institutions over $10 billion in assets offer Internet Banking. And smaller institutions are not far behind. Between the 2nd Quarter of '98 and the 3rd Quarter of '99, Internet banking grew by 226.9% for institutions with less than $100 million in assets and 258.1% for institutions between $100 million and $1 billion in asset size. Clearly mid-sized institutions were instituting online banking services at a rapid pace in response to the increased consumer acceptance of the Internet.


How effective are the Internet offerings of smaller banks and what impact do the offerings have on the institutions' profitability? According to the OCC's Internet Banking: Development and Prospects report, the news is very encouraging. Institutions offering Internet Banking out-performed non-Internet banks in terms of profitability, with the exception of de novo institutions. The ROE and accounting efficiency (non-interest expense to net operating revenue) were higher for institutions offering Internet banking than those that did not.

Since Internet banking often serves a relatively small share of a bank's customer base as a delivery channel, previous reports have been unable to determine the impact on bank performance. For example, Moody's Investor Service (2000) stated that "Moody's does not foresee much impact from the Internet on large U.S, Banks core profitability or competitive position - at least in the near term." A 1999 report by Hitt, Frei and Harker found that banks' investment in Internet banking had not resulted in "new, profitable customers to the firm, as many banks had hoped. Rather, it seems to be to retain high-value customers."

Contrary to both these studies, the OCC report clearly shows that by the 3rd Quarter of 1999, differences in performance between Internet and non-Internet banks are beginning to emerge. Institutions offering Internet banking were clearly winners.

Other findings of the OCC study:
  • Banks in all size categories offering Internet banking tend to rely less on interest-yielding activities and deposits than do non-Internet banks.
  • Most of the growth in new Internet banking will be due to small banks coming online. Projections based on banks' plans as of the 3rd Quarter indicate that 45 percent of all national banks will offer Internet Banking beginning 2001.
  • Large banks are more likely than smaller banks to offer a broader range of services, such as bill payment, credit applications, and brokerage and insurance services.

The adoption model of Internet banking services appears to be rapidly increasing. Smaller institutions close to urban areas are more likely to adopt Internet Banking services to compete with larger institutions.

The OCC's full report can be found online at: http://www.occ.treas.gov/ftp/workpaper/wp2000-9.pdf

If your institution is considering implementing online banking, but has not yet done so, this report is a must-read.

Michele Petry, Ph.D., is President of the Glia Group, an Internet consulting and web strategy firm. Prior to forming Glia, Michele was the Director of Specialized Services at Thomson Financial Publishing where she served as publisher of Thomson's Blue Book, The Banker's Guide to Product and Service Providers, and was responsible for the redesign of the online Thomson Financial Marketplace, launched in June of 1999.

First published on BankersOnline.com 12/18/00.
Copyright, 2000, BankersOnline. All rights reserved.




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