An Analysis of the Impact of the Internet on Competition in the Banking Industry, Using Porter's Five Forces Model

Article excerpt

The emergence of the Internet has created both threats and opportunities for banking executives. Those who are able to leverage competitive benefits from the Internet are confronted with significant business potential. The Internet has fundamentally changed traditional relationships and services within the banking industry. It shifts the overall competitive landscape, the technical and standards infrastructure, and the requirements of individuals and business users. The impact of the Internet on the banking industry and Internet banking as a source of competitive advantage have become challenging issues for both business managers and academics. This article uses the theoretical framework of Michael Porter's Industry 5-Force Competitive Model as the theoretical framework to analyze the ways that the Internet is affecting the competitive dynamics of the banking industry.

Introduction

The Internet's compelling effect on the commercial world is its ability to pull enormous information from virtually every corner of the globe (Engelman, 1996). Today every business model is evolving to adapt to the growing acceptance of the Internet and Ecommerce. Banking is no exception. E-commerce fundamentally changes the existing business models, shifting the balance of power from the bank to the individual customer (Brennand, 1999). The impact of the Internet on the banking industry is often undervalued by executives. The primary problem is that Internet banking is often confused with the traditional Personal Computer (PC) Remote Home Banking, which has been available for more than 20 years. Despite its innovations, this form of banking did not live up to its predicted level of success.

Many banks have experienced problems with home banking. The Chemical Bank in the United States introduced Pronto Home Banking and Pronto Business Banker for small businesses in the early 1980s. Pronto failed to attract enough customers to break even and was abandoned in 1989 along with Citicorp's Direct Access and Chase Manhattan's Spectrum home banking. The fundamental questions facing most executives are whether Internet banking will face the same situation and whether customers will adopt this service. Their concerns are understandable considering that the Security First Network Bank, recognized as the first virtual bank in the world, and other Internet banks are still struggling for profits.

However, things are changing. Netbank, launched in 1996 as Atlanta Internet bank, reported $4.5 million in net income for 1998, versus a $5.6 million loss the year before, demonstrating that the words "Internet banking" and "profitability" are not mutually exclusive. The issue of whether Internet banking can satisfy what customers want remains an unanswered question for most executives. The difficulty may be inadequate understanding of the competitive aspects of the Internet in the industry as a whole, or of how the Internet can be leveraged to act as a competitive weapon in businesses.

In view of these issues, this study aimed to examine how the emergence of the Internet is likely to affect the competitive landscape of the banking industry. This paper analyzes ways in which the Internet impacts on the competitive dynamics of the banking industry, using the theoretical framework of Porter's Industry 5-Forces Competitive Model.

Internet Banking: A New Paradigm

Today, the Internet has evolved into a commercial technology usable by a broad spectrum of business people involved in E-Commerce. The real value of E-Commerce comes from enhancing communication and transactions with customers, business partners, suppliers, government regulators and the public at large and ultimately moving towards an electronic marketplace where goods and services are transacted over the Internet (Watson, et. al 2000).

Internet banking refers to the use of the Internet as a channel in the delivery of banking products and services (Starita, 1999). …