The Economics of Online Banking (1,040 words)
By Tom Ebling
In the six years or so since the Internet went mainstream, it has rocked even the most staid financial institutions right down to their marble floors. Prior to the Web, competition in the financial services arena was largely regional, with consumers having only limited options from which to shop for auto loans, checking accounts and mortgages.
But all that changed with the Web. Now dozens of personal-finance sites—and nearly every major Web portal—are delivering up-to-the minute rate comparisons to home computers all across the globe, all with online loan applications a quick click away. By placing product rates side-by-side for the whole world to see, the Internet has laid bare the fundamental economic underpinnings of banks and credit unions everywhere, to the point where competition for customers has become purely a numbers game.
Oddly enough, financial services institutions are looking to the Internet to help alleviate the very pressures caused by the Internet. How so? Again, it breaks down to numbers. To service an in-branch transaction, it may cost a financial institution as much as $2.50, including overhead and operational costs. To service that same transaction via an ATM or call center costs considerably less, somewhere around 50 cents. But that's nothing compared to the Web. To service this same hypothetical transaction via home computer might cost a mere nickel.
The power of this cost savings is monumental because with every customer that adopts the Internet as the service channel of choice, the bank gains economic advantage. The more customers migrate to the Internet, the easier it becomes for the bank to offer competitive rates. The better the rates become, the more customers a bank can attract. The more customers the bank attracts, the better the rates become, and so on. It's the kind of competitive snowballing that marketers love or hate, depending on which way the ball's rolling.