Anticipating the future's risks and rewards of community banks going online
It's never easy to get a clear picture of a moving object, especially when the object is moving as rapidly as banking technology is today. One thing, however, is clear. Technology, which has already transformed the financial services marketplace, will transform it even further in the future. And no technological development in our time holds greater power to transform than the Internet.
Few observers of the banking scene will dispute that point. But as bankers and regulators, we have a responsibility to look beyond the hype to the hard questions. Where exactly has the Internet taken us so far? Where exactly will it take the banking industry in the near future? What special risks-individually or in combination-does it present?
What follows is a modest attempt to answer these questions-to offer a status report on Internet banking and on the steps that we at the Office of the Comptroller of the Currency are taking to cope with the very real challenges Internet banking poses.
Present and Future Impact
Certainly, Internet banking has come a long way in just a few short years. As 2001 began, more than one-third of all national banks offered transactional Internet banking-that is, the ability to conduct banking business via the Internet. Most large banks offer Internet banking now, and OCC economists estimate that approximately 90 percent of all customers bank at an institution offering Internet banking.
Yet it's also clear that Internet banking has by no means revolutionized banking-not yet anyway. Despite its widespread availability, only about 13 percent of U.S. households actually use the Internet to bank. And only about two dozen banks and thrifts operate as "Internet-only" institutions. Further, there is little evidence yet that Internet banking has boosted the bottom line, either for brick-and-mortar banks offering it or for Internet-only banks. Indeed, many bankers offering Internet banking indicate that they do so in a defensive sense, to retain customers, and not because they believe that offering the service will generate new revenue or reduce costs.
The impact of the Internet on community banks has been even less substantial. A minority of small banks offer Internet banking, and a large number of smaller institutions have no concrete plans to offer it. Many of these institutions do not currently see Internet banking as critical to their success. Even those community banks inclined to offer Internet banking are often reluctant to take the plunge into the unknown.
Clearly, we should exercise healthy skepticism when confronted by sweeping claims about the impact of the Internet. Nevertheless, thereare sound reasons to think that Internet banking will continue to grow in importance.
First, the Internet banking era has really just begun. As recently as 1997 only about 100 banks and thrifts offered banking over the Internet. Since that time, the rate at which banks have "gone online" has been rapid, especially compared to the early phases of other technology-based banking services such as ATMs.
Moreover, some banks, including some of the nation's largest institutions, offer their customers services over the Internet as a major component of their business and marketing strategies. And although the number of community banks offering services over the Internet to their customers is still small, an increasing number are doing so through arrangements with third-party providers.
The impact of the Internet on the banking industry is not simply a question of how many bank customers will check balances, transfer funds and pay bills via the Internet. Fundamentally, the business of banking involves the collection, storage, transfer and processing of information assets, and the Internet is an incredibly powerful and efficient tool for handling these processes. It …