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Learning-by-doing, scale efficiencies, and financial performance at Internet-only banks

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  • Robert DeYoung
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    Abstract

    In theory, Internet-only banks should have low overhead expenses, and thus should be able to charge better prices (lower fees, higher deposit rates, lower loan rates) and still earn normal profits. To test this theory, this study compares the financial performance of 10 new Internet-only banks to the financial performance of 569 new traditional banks. On average, Internet-only start-up banks have been less profitable than traditional bank start-ups. Output volumes were low, and savings from low overhead were offset by high costs in other noninterest expense categories. However, as the Internet-only start-ups aged and/or grew larger, their profitability improved relative to the traditional start-ups. Internet-only banks may be (a) on a steeper learning curve than traditional banks and (b) may have access to deeper scale economies than traditional banks.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-01-06.

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    Date of creation: 2001
    Date of revision:
    Handle: RePEc:fip:fedhwp:wp-01-06

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    Related research

    Keywords: Banks and banking ; Electronic commerce ; Economies of scale ; Education;

    This paper has been announced in the following NEP Reports:

    References

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    1. Rossi, Clifford V., 1998. "Mortgage Banking Cost Structure: Resolving an Enigma," Journal of Economics and Business, Elsevier, vol. 50(2), pages 219-234, March.
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    8. Jeffrey A. Clark, 1988. "Economies of scale and scope at depository financial institutions: a review of the literature," Economic Review, Federal Reserve Bank of Kansas City, issue Sep, pages 16-33.
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    10. Douglas D. Evanoff & Philip R. Israilevich, 1991. "Productive efficiency in banking," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jul, pages 11-32.
    11. DeYoung, Robert & Hasan, Iftekhar, 1998. "The performance of de novo commercial banks: A profit efficiency approach," Journal of Banking & Finance, Elsevier, vol. 22(5), pages 565-587, May.
    12. David B. Humphrey, 1990. "Why do estimates of bank scale economies differ?," Economic Review, Federal Reserve Bank of Richmond, issue Sep, pages 38-50.
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    Cited by:
    1. Robert DeYoung & William C. Hunter, 2001. "Deregulation, the Internet, and the competitive viability of large banks and community banks," Working Paper Series WP-01-11, Federal Reserve Bank of Chicago.
    2. W. Scott Frame & Lawrence White, 2002. "Empirical Studies of Financial Innovation: Lots of Talk, Little Action?," Working Papers 02-18, New York University, Leonard N. Stern School of Business, Department of Economics.
    3. Luiz Humberto Cavalcante Veiga, 2006. "Diferenciação Horizontal e Poder de Mercado: Os Efeitos do E-Banking sobre as Tarifas Bancárias," Economia, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics], vol. 7(2), pages 365-393.

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