Do European Primarily Internet Banks Show Scale and Experience Efficiencies?

29 Pages Posted: 15 Aug 2007

See all articles by Javier Delgado

Javier Delgado

Banco de España

Ignacio Hernando

Banco de España

Maria Nieto

Banco de España

Abstract

Empirical evidence shows that Internet banks worldwide have underperformed newly chartered traditional banks mainly because of their higher overhead costs. European banks have not been an exception in this regard. This paper analyses, for the first time in Europe, whether this is a temporary phenomenon and whether Internet banks may generate scale economies in excess of those available to traditional banks. Also do they (and their customers) accumulate experience with this new business model, allowing them to perform as well or even better than their peers, the traditional banks? To this end, we have generally followed the same analytical framework and methodology used by DeYoung (2001, 2002, 2005) for Internet banks in the USA although the limitations in the availability of data, as well as the existence of different regulatory frameworks and market conditions, particularly in the retail segment, in the 15 European Union countries have required some modifications to the methodology. The empirical analysis confirms that, as is the case for US banks, European Internet banks show technologically based scale economies, while no conclusive evidence exists of technology based learning economies. As Internet banks get larger, the profitability gap with traditional banks shrinks. To the extent that Internet banks are profitable, European authorities may encourage a larger number of consumers to use this delivery channel, by tackling consumers security concerns. This would allow Internet banks to capture more of the potential scale efficiencies implied in our estimations.

Suggested Citation

Delgado, Javier and Hernando, Ignacio and Nieto, Maria J., Do European Primarily Internet Banks Show Scale and Experience Efficiencies?. European Financial Management, Vol. 13, No. 4, pp. 643-671, September 2007. Available at SSRN: https://ssrn.com/abstract=1006910 or http://dx.doi.org/10.1111/j.1468-036X.2007.00377.x

Javier Delgado (Contact Author)

Banco de España ( email )

Madrid 28014
Spain

Ignacio Hernando

Banco de España ( email )

Madrid 28014
Spain
+34 91 338 5186 (Phone)
+34 91 338 5678 (Fax)

Maria J. Nieto

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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