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In a study of how banks are responding to the rapid growth of on-line commerce, New York Fed assistant vice president John Wenninger identifies certain trends and potential strategic risks that could change the basic business mix of banking.
According to Wenninger, banks have already begun to use the Internet as a supplementary channel for delivering traditional credit and deposit services by establishing transactional web sites where individuals can check balances or transfer funds and where small businesses can apply for loans or take advantage of cash management services.
In addition, Wenninger reports, some large banks are investigating how they might expand their current offerings to include some products designed specifically for e-commerce. These products include electronic billing and collection services, the issuance of electronic money and checks, and the verification of identities for e-commerce participants. A few of the largest commercial banks have undertaken to help firms automate their transactions with suppliers, distributors, and retailers, according to Wenninger. The success of these products, according to Wenninger, could prompt some banks to scale back the size and scope of their branch networks and devote more resources to the development and maintenance of computer networks and e-commerce software.
Wenninger reports that banks will face new forms of competition in the electronic marketplace. One potential rivalbanks that operate exclusively on the Internetmay be able to offer more attractive deposit and loan rates than many traditional banks because they do not need to support a costly branch network. Other competitive pressures will arise as electronic "information aggregators" search out the most favorable rates on deposits and mortgages and release their findings on-line. According to Wenninger, the ability of consumers to comparison-shop for the best rates across institutions and across geographic areas may weaken banks market power in local regions.
Banks also will encounter new strategic risks according to Wenninger. In particular, he notes the danger that banks will misjudge the degree to which electronic banking will substitute for more traditional forms of banking. Currently, it is unclear whether on-line banking will supplement the existing "brick and mortar" branch networks or substantially replace them. According to Wenninger, the uncertainty of the outcome means that it is difficult for banks to make decisions about scaling back their branches. He reports that banks that adjust the size and scope of their branch networks too quickly or dramatically run the risk of alienating those segments of their customer base that are not ready to rely fully on electronic banking.
Wenninger also finds that banks entry into the electronic arena will bring with it increased exposure to technological problems such as computer and network breakdowns that could result in customer dissatisfaction and lost business for banks.