Microsoft Word Arnaboldi Claeys ib2 final

Research Institute of Applied Economics Working Papers 2008/11, 28 pages
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Internet Banking in Europe a comparative analysis By Francesca Arnaboldi
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and Peter Claeys
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Dipartimento di Economia, Università di Milano. Via
Festa del Perdono 7, 20122 Milano. Email farnaboldi@unimi.it
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AQR Research Group - IREA. Department of Econometrics, University of Barcelona. Avda. Diagonal, 690. 08034 Barcelona, Spain. Email
Peter.Claeys@ub.edu.
Abstract:
A key strategic issue for banks is the implementation of internet banking. The click and mortar model that complements classical branch banking with online facilities is competing with pure internet banks. The objective of this paper is to compare the performance of these two models across countries, so as to examine the role of differences in the banking system and technological progress. A fuzzy cluster analysis on the performance of banks in Finland, Spain, Italy and the UK shows that internet banks are hard to distinguish from banks that follow a click and mortar strategy country borders are more important. We therefore explain bank performance by a group of selected bank features, country-specific economic and IT indicators over the period 1995-2004. We find that the strategy of banking groups to incorporate internet banks reflects some competitive edge that these banks have in their business models. Extensive technological innovation boosts internet banking.
Key words
Banks, Internet, Innovation.
JEL codes
G21, O.
.

1. INTRODUCTION
Alternatives to classical branch banking have attracted increasing attention as Internet usage started to spread. Banks started to use the internet not only as an innovative payment method and to increase customer convenience, but also as away to reduce costs and enhance profits. Fierce competition between banks, both in retail and wholesale, has forced banks to find new and profitable areas whereto expand. But Internet banking seems to represent a viable strategy also for new entrants in the banking sector. Two main business models maybe identified in the use of banking portals online. Classic banks start to cross-sell bank products via a website in order to reach new clients and diversify their distribution channels (click and mortar’).
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Nearly half of US banks were using transactional websites at the beginning of
2002. An alternative strategy is the creation of a pure internet bank (IB) without the support of a network of physical branches. Only a few banks have adopted a pure online business model. After the initial internet hype faded, some were forced to exit the market via liquidation or acquisition others developed a mixed model and opened physical branches. Only a few pure online banks were able to achieve profits and survive. We observe instead banks integrating pure online banks in the banking group a pure IB is part of a banking group but perceived by clients as an external, innovative bank. The growth pains of online banking raise some questions on the success of either strategy. What drives the choice among different internet banking models The adoption of online banking as a product or process innovation is in first instance driven by bank-specific factors. Banks have strengths and weaknesses that may influence the choice of the online banking model. Initial conditions are important determinants in this choice. The managerial implications are various, yet a winning model for IB requires more than a change in banking strategy. External factors may facilitate the adoption of online banking. General economic features such as the level of investment in technology (ICT, broadband, internet access, and so forth, RD expenses, and the skill of end-users with new technologies may influence the development of online banking. Some countries may have economic and technological features favouring IB development. This has interesting implications for
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“Transactional Websites have been defined by DeYoung (2005) as websites which allow customer remote access to banking services. The most basic transactional websites allow few operations such as money transfers, payments, and checking account balances. Some websites allow their customers to apply for mortgages and loans and manage clients investments.

economic policy. Reform of financial legislation and more generally boosting innovation in financial markets is known to spur economic growth. Few studies have focused on the latter topic. Much of the evidence on the development of online banking focuses on a specific bank market in one country. Likewise, we compare pure
IBs to mixed banks on different cost and performance measures. We use indicators at the level of the banking groups that own a mixed or pure IB, as data do not allow detailing costs at the level of business units. Our analysis attempts to isolate those features specifically linked to internet banking. We endeavour to group pure and mixed IBs banks according to certain performance criteria and bank characteristics. We then provide panel estimates of bank performance on the basis of these bank-specific characteristics. Banking group performance and cost are influenced by many variables. The contribution of this paper is to compare the performance of banking groups with pure IB to mixed internet banks across four EU countries (Finland, Italy, Spain and the UK. In particular, we examine the impact of country-specific features on the development of online banking. Fragmentation of the EU banking system hinders the creation of pan-European banking groups. Yet this division allows looking in the consequences of different banking systems and the level of technological development on innovation in the banking industry. We relate performance to various country-specific characteristics. The paper is structured as follows. In section 2, we discuss the few studies that have examined the performance of pure IBs relative to mixed banks. We argue, in section 3, that differences in banking structure and macro-micro features of economies are decisive in the performance of online banks. We provide a descriptive cluster analysis of banking structure and country-
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pecific characteristics for Finland, Italy, Spain and the UK. In section 4, we analyse the performance of pure and mixed IBs, and relate these to bank and country- specific characteristics. We conclude with some policy implications in section 5.