Financial Innovation in Internet Banking: A Comparative Analysis

Abstract

A key strategic issue for banks is the relative success of pure Internet banks and internet banking facilities offered by existing banks as part of an overall banking strategy (the click and mortar model). The object of the paper is to compare the performance of the two models across countries: Finland, Spain, Italy and the UK that have different banking systems and different levels of technological advance. From the fuzzy cluster analysis we found that internet banks are hard to distinguish from banks that adopt both click and mortar strategies. Country specific features seem to be important in explaining differences across banks. We therefore explain the performance of banks by a group of selected bank specific features, country specific macroeconomic indicators and information technology related ratios over the period 1995-2004. We find that the strategy of banking groups to incorporate internet banks reflects some competitive edge that these banks have in their business models.

Keywords: Banks, Internet, Innovation

JEL Classification: G21, O32