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Internet banking: an exploration in technology diffusion and impact

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  • Richard J. Sullivan
  • Zhu Wang

Abstract

This paper studies endogenous diffusion and impact of a cost-saving technological innovation -- Internet Banking. When the innovation is initially introduced, large banks have an advantage to adopt it first and enjoy further growth of size. Over time, as the innovation diffuses into smaller banks, the aggregate bank size distribution increases stochastically towards a new steady state. Applying the theory to a panel study of Internet Banking diffusion across 50 US states, we examine the technological, economic and institutional factors governing the process. The empirical findings allow us to disentangle the interrelationship between Internet Banking adoption and growth of average bank size, and explain the variation of diffusion rates across geographic regions.

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File URL: http://www.kansascityfed.org/publicat/psr/rwp/IBANK-Sullivan-Wang.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Kansas City in its series Payments System Research Working Paper with number PSR WP 05-05.

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Date of creation: 2005
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Handle: RePEc:fip:fedkpw:psrwp05-05

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Keywords: Internet ; Internet banking ; Technology;

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References

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  1. Kevin J. Stiroh, 2002. "Information Technology and the U.S. Productivity Revival: What Do the Industry Data Say?," American Economic Review, American Economic Association, vol. 92(5), pages 1559-1576, December.
  2. Allen N. Berger & Robert DeYoung, 2002. "Technological progress and the geographic expansion of the banking industry," Proceedings 817, Federal Reserve Bank of Chicago.
  3. Cabral, Luís M B & Mata, José, 2001. "On the Evolution of the Firm Size Distribution: Facts and Theory," CEPR Discussion Papers 3045, C.E.P.R. Discussion Papers.
  4. Zhu Wang, 2007. "Technological Innovation and Market Turbulence: The Dot-com Experience," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(1), pages 78-105, January.
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  7. Roberto Fuentes & Rubén Hernández-Murillo & Gerard Llobet, 2007. "Strategic online-banking adoption," Working Papers 2006-058, Federal Reserve Bank of St. Louis.
  8. Rodolfo Manuelli & Ananth Seshadri, 2003. "Frictionless technology diffusion: the case of tractors," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
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  12. Allen N. Berger & Loretta J. Mester, 2001. "Explaining the Dramatic Changes in Performance of U.S. Banks: Technological Change, Deregulation and Dynamic Changes in Competition," Center for Financial Institutions Working Papers 01-22, Wharton School Center for Financial Institutions, University of Pennsylvania.
  13. Richard Sullivan, 2004. "Payment services and the evolution of Internet banking," Payments System Research Briefing, Federal Reserve Bank of Kansas City, issue Aug.
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  18. Courchane, Marsha & Nickerson, David & Sullivan, Richard, 2002. "Investment in internet banking as a real option: theory and tests," Journal of Multinational Financial Management, Elsevier, vol. 12(4-5), pages 347-363.
  19. Zhu Wang, 2006. "Learning, diffusion and the industry life cycle," Payments System Research Working Paper PSR WP 04-01, Federal Reserve Bank of Kansas City.
  20. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
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  22. Zhu Wang, 2008. "Income Distribution, Market Size and the Evolution of Industry," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 542-565, July.
  23. Michael P. Murray, 2006. "Avoiding Invalid Instruments and Coping with Weak Instruments," Journal of Economic Perspectives, American Economic Association, vol. 20(4), pages 111-132, Fall.
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Citations

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Cited by:
  1. Orviska, Marta & Hudson, John, 2009. "Dividing or uniting Europe? Internet usage in the EU," Information Economics and Policy, Elsevier, vol. 21(4), pages 279-290, November.
  2. Zhu Wang, 2007. "Technological Innovation and Market Turbulence: The Dot-com Experience," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(1), pages 78-105, January.
  3. Zhu Wang, 2008. "Income Distribution, Market Size and the Evolution of Industry," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 542-565, July.
  4. James McAndrews & Zhu Wang, 2012. "The economics of two-sided payment card markets: pricing, adoption and usage," Working Paper 12-06, Federal Reserve Bank of Richmond.
  5. John Goddard & Donal McKillop & John Wilson, 2009. "Which Credit Unions are Acquired?," Journal of Financial Services Research, Springer, vol. 36(2), pages 231-252, December.
  6. Zhu Wang, 2006. "Technology Innovation and Market Turbulence: A Dotcom Example," 2006 Meeting Papers 508, Society for Economic Dynamics.
  7. Sullivan, Richard J., 2013. "The impact of debit card regulation on checking account fees," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 59-93.
  8. Roberto Fuentes & Rubén Hernández-Murillo & Gerard Llobet, 2007. "Strategic online-banking adoption," Working Papers 2006-058, Federal Reserve Bank of St. Louis.
  9. James McAndrews & Zhu Wang, 2007. "Microfoundations of Two-sided Markets: The Payment Card Example," DNB Working Papers 128, Netherlands Central Bank, Research Department.
  10. David VanHoose, 2009. "Internet Banking," NFI Policy Briefs 2009-PB-12, Indiana State University, Scott College of Business, Networks Financial Institute.

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