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Internet-only Banks: Uncertain Innovation(Vol.7 No.1)

연구조정실 2004.08.10 9670

Internet-only Banks: Uncertain Innovation(Vol.7 No.1)

Sangche Lee
:Research Fellow, Korea Institute of Finance (Tel. 02-3705-6315, E-mail:
 I thank the anonymous referees for their helpful comments and suggestions.  The author is completely responsible for all the remaining errors.

Based upon Dasgupta and Stiglitz(1988), this paper seeks to determine whether an Internet-only bank, which by definition operates only on the Internet and has no physical branches, can enter the banking industry occupied by multi-channel banks or continue to survive successfully when Bertrand price competition prevails in the market.
The successful entry and the survival of an Internet-only bank depends on many factors.  Existing literature asserts that an Internet-only bank can enter the market if the banking service product is identical (Yoo2002) or customer segmentation by banks is impossible (Ahn and Kang 2003).  However, in this paper we show that even if the product is the same and banks cannot differentiate their customers, the entry of an Internet-only bank may still be deterred or such a bank would be less profitable if the efficiency gain to traditional banks from the learning-by-doing effect in the production of banking services is large enough to offset their cost disadvantage in the business channel.  When the scope of learning in banking service production is rather small and an Internet-only bank is far-sighted, we may get the generally expected result of successful entry.
One policy implication of the above finding is that the validity of the 'infant-industry argument' depends on the shape of the learning curve of existing multi-channel banks and the total volume of market demand.

JEL Classification Number : G21, L11
Key Words: Internet-only bank, business channel, learning effect, price competition


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