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

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  • 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.

Suggested Citation

  • Robert DeYoung, 2001. "Learning-by-doing, scale efficiencies, and financial performance at Internet-only banks," Working Paper Series WP-01-06, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-01-06
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    References listed on IDEAS

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    Cited by:

    1. 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 Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics], vol. 7(2), pages 365-393.
    2. W. Scott Frame & Lawrence J. White, 2004. "Empirical Studies of Financial Innovation: Lots of Talk, Little Action?," Journal of Economic Literature, American Economic Association, vol. 42(1), pages 116-144, March.
    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.
    4. repec:eee:quaeco:v:66:y:2017:i:c:p:70-99 is not listed on IDEAS

    More about this item

    Keywords

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

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