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

  • Robert DeYoung
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    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
    Date of revision:
    Handle: RePEc:fip:fedhwp:wp-01-06
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