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During the period of the Internet boom a number of stand-alone Internet banks were established by non-bank companies. Their business model was based on rapidly attracting a large, retail deposit base by marketing aggressively and offering higher rates than traditional banks. They then planned to market mortgages, credit cards and other retail products to that base. Other less ambitious operators chose to offer specialist services such as searching the Web to get the best terms for a mortgage loan, car loan or insurance policy. Only a few of the hopeful new entrants have survived the test of time.
Larger, established banks saw the Internet as less of a threat than an opportunity. They already had the customer relationships and multiple distribution channels that would make it difficult for new entrants to compete. Some did establish their own “Internet bank” with different branding from their parent (and these are among the few survivors) but most eventually decided that it was better to simply use the Internet as one more delivery channel.
Some estimates put the cost to a bank of a customer making a transaction through the Internet at less than 1% of the cost of having it done through a branch. The emergence of Internet banking has had three major effects on competition. The first is that it has raised customer expectations on pricing and availability of service. The second is that it is helping to force banks to strive for an optimal balance between providing services through branches, ATMs and other delivery channels. The third is that it has increased the level of potential scale economies and hence pressures for consolidation.