Innovation and performance of European banks adopting Internet

Ebanking has been a bit of a fad. Virtual banks were believed to challenge traditional banks. The burst of the internet bubble brought down this first generation of internet banks. Traditional branch banks have gone online since. Existing banks started to buy up some failed internet banks; some have set up an internet bank of their own. It seems this second generation of online banks performs better (DeYoung et al., 2007). However, other traditional banks have started to complement branch banking with simpler online facilities, like an internet portal. We examine the reasons for banking groups to either own an internet bank or provide an internet portal. On a panel of the 60 largest EU banking groups over the period 1995-2005, we find that banks with a heavy cost structure and a large market share in client deposits and noninterest activities are more likely to introduce internet banking. Concentration in the banking market favours adoption of internet banking although in some markets, like France or Italy, M&A have been an easy way to acquire small internet banks. There is little evidence of economies of scope in ICT development. The performance of the banking groups with an internet bank is poor. It has mainly created additional costs (although labour costs have been cut) but so far, little return.