Money being invested in developing online banking capacity is a gamble, according to the Centre for ...
Money being invested in developing online banking capacity is a gamble, according to the Centre for the Study of Financial Innovation (CSFI).
Over-optimistic projections about potential users, and a cherry-picking mentality among banks, which are only offering a narrow range of services online, mean that in Europe only a third of current users are active. Moreover, one third drop the service within a year, according to the CSFI
The picture is mirrored in the US, where the annual rate of growth in internet banking has dropped from 36% to 8% over the last three years. So far, no internet banking business has yet to make a profit.
CSFI evidence suggests internet banks attract a different breed of customer, more likely to have been attracted from a rival internet bank than a traditional bank. So the market shares being bought at a substantial loss are very difficult to protect.
Andrew Hilton, director of the CSFI, said hype and over-optimism have led to a blind and unquestioned belief that internet banking cannot fail.
Not only is it failing to impress customers, it is also failing to produce evidence that its business models are sustainable, he added.
Claims that internet-based US-style execution only discount brokerages will migrate to the UK are unlikely, Hilton said.
Yet business to business services such as bond sales, electronic communication networks, and net-based IPOs, could be the internet applications most likely to bring lasting change to the financial world.
Hilton pointed out internet banking, which has been transforming financial institutions' stock value, might be more useful as a banking sideline, a way of retaining customers and prestige at an additional cost, rather than a revolution.
Hilton said promises of technological advances, which would make online banking quicker, easier and assuage users' security worries, have yet to materialise.
Hilton sees no more potential in internet-broking, which has become a fixture in the US, and said Europe and the UK are years away from an equity culture comparable to the US. Stamp duty also handicaps the UK take-up of such services, he added.
However, Hilton does believe the internet will have a much more significant impact on investment banking and electronic exchanges. In the US established investment banks are finding an increasing number of online competitors in the bond market, and that bond issues are being made directly over the net.
If the UK follows the US, the internet could facilitate the emergence of new investment banks, Hilton believes.
He said the rising use of electronic cross networking is an area of increasing industry cost-saving for institutional investors.
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