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

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Author Info
Robert DeYoung
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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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
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Handle: RePEc:fip:fedhwp:wp-01-06

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

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Eli M. Remolona & Kurt C. Wulfekuhler, 1992. "Finance companies, bank competition, and niche markets," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 25-38.
  2. Robert DeYoung, 2001. "The financial performance of pure play Internet banks," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 60-78. [Downloadable!]
  3. Joseph P. Hughes & William W. Lang & Loretta J. Mester & Choon-Geol Moon, 1997. "Recovering risky technologies using the almost ideal demand system: an application to U.S. banking," Working Papers 97-8, Federal Reserve Bank of Philadelphia. [Downloadable!]
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  4. Zvi Griliches, 1979. "Issues in Assessing the Contribution of Research and Development to Productivity Growth," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 92-116, Spring. [Downloadable!] (restricted)
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  5. Berger, Allen N. & Hunter, William C. & Timme, Stephen G., 1993. "The efficiency of financial institutions: A review and preview of research past, present and future," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 221-249, April. [Downloadable!] (restricted)
  6. Daniel Huyser, 1986. "De novo bank performance in the seven Tenth District states," Financial Industry Perspectives, Federal Reserve Bank of Kansas City, pages 13-22.
  7. Hartley, Keith & Corcoran, W, 1978. "The Time-Cost Trade-Off for Airliners," Journal of Industrial Economics, Blackwell Publishing, vol. 26(3), pages 209-22, March. [Downloadable!] (restricted)
  8. Berger, Allen N. & Demsetz, Rebecca S. & Strahan, Philip E., 1999. "The consolidation of the financial services industry: Causes, consequences, and implications for the future," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 135-194, February. [Downloadable!] (restricted)
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  9. 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. [Downloadable!] (restricted)
  10. Patricia Brislin & Anthony M. Santomero, 1991. "De novo banking in the third district," Business Review, Federal Reserve Bank of Philadelphia, issue Jan, pages 3-12. [Downloadable!]
  11. Rossi, Clifford V., 1998. "Mortgage Banking Cost Structure: Resolving an Enigma," Journal of Economics and Business, Elsevier, vol. 50(2), pages 219-234, March. [Downloadable!] (restricted)
  12. Richard J. Sullivan, 2000. "How has the adoption of Internet banking affected performance and risk in banks?," Financial Industry Perspectives, Federal Reserve Bank of Kansas City, issue Dec, pages 1-16. [Downloadable!]
  13. William C. Hunter & Aruna Srinivasan, 1990. "Determinants of de novo bank performance," Economic Review, Federal Reserve Bank of Atlanta, issue Mar, pages 14-25.
  14. 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. [Downloadable!]
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Cited by:
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  1. W. Scott Frame & Lawrence J. White, 2002. "Empirical studies of financial innovation: lots of talk, little action?," Working Paper 2002-12, Federal Reserve Bank of Atlanta. [Downloadable!]
  2. Luiz Humberto Cavalcante Veiga & André Luís Rossi de Oliveira, 2003. "Diferenciação Horizontal e Poder de Mercado: os Efeitos do E-BANKING Sobre as Tarifas Bancárias," Anais do XXXI Encontro Nacional de Economia [Proceedings of the 31th Brazilian Economics Meeting] d48, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
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  3. 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. [Downloadable!]
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