How Has the Adoption of Internet Banking Affected Performance and Risk in Banks?

F I N A N C I A L I N D U S T R Y P E R S P E C T I V E S 2 0 0 0 1 Internet technology holds the potential to fundamentally change banks and the banking industry. For individual banks, the Internet may “level the playing field” by allowing all banks to easily offer innovative products and access new customers. But a bank that adopts Internet banking must develop different methods of conducting business, methods that may introduce new risks to the bank. For the banking industry, the Internet introduces competitive pressures that may bring significant changes. An extreme view speculates that the Internet will destroy old models of how bank services are developed and delivered. Whether or not this extreme view proves correct, most observers expect that the Internet will have a profound influence on the banking industry.1 It is therefore important for bankers, bank supervisors, and policymakers to understand how Internet banking affects the performance of banks. The main goal of this study is to determine whether banks have carefully introduced Internet banking to their markets, and whether they have been helped or harmed by their early commitment to a new and relatively untested technology. To reach this goal, this article explores three interrelated questions. Has Internet banking been introduced into markets that will facilitate customer acceptance? Is the use of the Internet consistent with the business strategy of banks? Are performance measures, such as expenses, profitability, or risk, better or worse among banks that have adopted Internet banking compared to those that have not? To answer these questions, I present in this article an analysis of a sample of banks that are located Richard J. Sullivan Richard J. Sullivan is an economist in the Division of Supervision and Risk Management of the Federal Reserve Bank of Kansas City. The author thanks Nancy Novack and Kevin King, who provided some of the data used in this study, and many members of the Division of Supervision and Risk Management for help in reviewing bank Web sites. The article has greatly benefited from presentations at the Federal Reserve Bank of St. Louis, the Federal Reserve Bank of Chicago, and Colorado State University. The views expressed in this article are those of the author and do not necessarily reflect those of the Federal Reserve Bank of Kansas City or of the Federal Reserve System. How Has the Adoption of Internet Banking Affected Performance and Risk in Banks?