NCPA - National Center for Policy Analysis

Is E-Commerce A Threat To Traditional Banks?

October 20, 2000

Online banking is believed to offer a low-cost and convenient alternative to the traditional distribution channel of banking services. However, two recent studies argue that online banking does not threaten traditional banks due to the low volume of transactions.

One study found that:

  • Telebank and NetBank had not captured their first 100,000 customers, while the three leading traditional banks in the U.S. have 3 million customers.
  • Customers are uneasy about the inability to make deposits except by automatic teller machines and with the lack of face-to-face contact.
  • Physical branches overwhelmingly bring in more customers, accounting for 80 percent to 90 percent of new deposit, loan and investment accounts.

The authors argue that customers treat online banking as an extra channel to check their balances and transaction histories and little more. Most customers prefer tellers and a physical presence in a bank. Because of this, the expansion of banking to the internet has been limited.

However, online banking may threaten traditional banks in the future. According to another study:

  • McKinsey research reveals that 75 percent of online banking customers are willing to transfer funds into brokerage accounts that offer basic e-banking.
  • Local insurance companies and retailers have provided the physical presence for online banks to work through.

The authors contend that as online banks find alternative ways to provide a physical presence, their popularity and profitability will increase.

Source: "The Future of Online Banking", Economic Intuition, Summer 2000. Based on Sandra Boss, Dvin McGranahan and Asheet Mehta, "Will the banks control on-line banking?" and Matthias M. Bekier, Dorlisa K. Flur and Seelan J. Singham, "A future for bricks and mortar," both McKinsey Quarterly, No. 3, 2000.


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