The Financial Performance of Pure Play Internet Banks

By Robert, DeYoung | Economic Perspectives, Spring 2001 | Go to article overview

The Financial Performance of Pure Play Internet Banks


Robert, DeYoung, Economic Perspectives


Introduction and summary

The number of banks and thrifts that offer financial services over the Internet is increasing rapidly in the U.S. By using "transactional websites," customers can check account balances, transfer funds, pay (and perhaps receive) bills, apply for loans, and perform a variety of other financial transactions without leaving their home or place of business. Approximately 1,100 U.S. banks and thrifts operated transactional websites at year-end 1999--an elevenfold increase over yearend 1997--and projections by bank regulators suggest that nearly half of U.S. banks will offer transactional websites by late 2001 or early 2002 (Furst, Lang, and Nolle, 2000).

Most banks and thrifts that operate over the Internet use a click and mortar business strategy, maintaining traditional networks of brick and mortar branches along with their transactional websites. Only a small number of banks and thrifts have completely abandoned physical branches in favor of a pure play Internet business strategy, relying exclusively on transactional websites to deliver banking services. As of mid-year 2000, less than two dozen of these virtual banks and thrifts were operating in the U.S., and their market penetration rates were in the low single digits. Various surveys report that Internet-only banks have captured less than 5 percent of the U.S. online banking market, and less than 1 percent of all Internet banking customers consider an Internet-only bank or thrift to be their primary bank. [1]

In theory, the pure play Internet model offers advantages for both banks and their customers. The central financial advantage stems from the savings associated with not having to operate branches. If being branchless substantially reduces physical overhead expenses, and if these savings are not offset by reductions in revenues or increases in other expense items, then, all else equal, Internet-only banks will earn high profits. Customers benefit not only from increased convenience, but also because these banks (again, in theory) can use some of their overhead cost savings to pay higher interest rates. The ability to pay above-market interest rates, combined with access to a much wider base of potential depositors, arguably allows these banks to grow faster than traditional banks.

In practice, however, the degree to which pure play Internet banks can actually deliver these benefits is not yet clear. The pure play business model, the banks that deploy it, and the technology on which it relies are still relatively young, so learning effects have not yet been exhausted. Furthermore, most of the existing evidence on Internet bank performance is anecdotal, and the few systematic studies of Internet bank performance do not distinguish between the pure play model and the click and mortar model.

This article represents a first attempt to analyze systematically the financial performance of pure play Internet banks. Unlike previous studies of Internet banks that include any branching or branchless bank that operates a transactional website, this article focuses on a small sample of six branchless banks and thrifts that distribute financial services exclusively through their websites. The pure play banks and thrifts in this sample are all newly chartered institutions, so I evaluate their financial performance relative to a benchmark sample of newly chartered banks and thrifts that have branches. I compare the two samples across 17 different measures of financial performance, using multiple regression analysis to control for differences in age, local economic environment, and regulatory conditions.

For this set of relatively young banks, my tests indicate that the average pure play Internet bank is significantly less profitable than the average branching bank. A number of factors contribute to this poor financial performance, including high labor expenses, low noninterest income, and difficulty attracting core deposits. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Financial Performance of Pure Play Internet Banks
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.