The Internet has invaded almost everysphere of society. Culture, leisure, sports,learning, and of course, economy and finance.Analyzing banking industry gives us somelight on this respect; according to Crede(1995), almost no banker believed up to 1995on the Internet as an alternative way for deliv-ering financial services. But at the end of thefirst semester of 1998, 6.3 percent of USnational banks was offering transactional ser-vices through the web, a figure that increasedto a 20 percent in just nine months, accordingto Furst, Lang, and Nolle (2000). In 15 monthsthe offering was increasing at an amazing rateof 188.2 percent. The Spanish banking system,with the logical gap, is evolving in the sameway, as we will later see. At the present time,all the big Spanish banks and the majority ofthe medium-sized ones are offering transac-tional Internet services; virtual banks hold ashare of 1.2 percent of the Spanish bankingindustry by December 31, 2000, measured interms of deposits, with a volume of depositsover Euro 3 billions, according to the SpanishBanking Association. These figures are evolv-ing quite fast, and by the end of Q2 2001 theshare jumped until 1.81 percent, at an increas-ing yearly rate of 100 percent, and the volumeover Euro 5.5 billions, a yearly rate of 167 per-cent.
The structure of the present paper is as fol-lows. I will first sum up the evolution ofe-banking in the USA, showing the main fea-tures of the business. Then I will go on with thecharacteristics of the business in Spain, withreferences to the European and South Ameri-can markets. The special situation of Spain asa member of the EC and as the second investorin South America is the fact behind this worksegmentation. Finally, I will explain what arethought to be the main challenges for the finaldevelopment of the transactional web services.
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The information about online banking is wide-spread and difficult to obtain directly from the
banks involved, maybe because it’s seen as anstrategic asset of the firm. We have collecteddata from prior studies developed by econo-mists of different Federal Reserve Banks of theUSA for the American market; in that sense,the research developed by Furst et al. (2000),along with those by De Young (1999; 2001a;2001b), or Sullivan (2000), offer an interestingpoint of view on the financials of online banks.Firms like Gómez, Inc. (2001), eMarketer.com(2001b) or the report by Pew Internet & Amer-ican Life Project (2001) also offer data on thesubject (the latter, just on the use of the Inter-net by the Hispanics in the States, with somesurprising findings on the use of online bank-ing by the Hispanic community towards thewasp one), but their results are neither easilynor directly exportable to the European andSpanish markets. Some consultancy firms asJupiter MMXI, NetValue, Cap Gemini Ernstand Young, Datamonitor, or some investmentbanks such as JP Morgan have developed theirown research on the subject, with interestingdifferences. At the time the paper is prepared,the main authority on the European bankingsystem, the European Central Bank, has noofficial information and has not developed anystudy on the impact of the Internet on the bank-ing system. And the Spanish Central Bank, themain authority in the Spanish financial system,is just now preparing its own study. In fact, asfar as June, 2001, the vice-governor of theSpanish Central Bank stated that a differentsupervising system should be established foronline banks, alleging differences in terms ofrisk between traditional and online banks (wewill later see that Sullivan (2000, p.10) doesn’tappreciate any difference between traditionaland online banks in terms of risk; but its studyjust focuses on banks of the American TenthDistrict, and anyway online American banksare older and they fight in a very different fieldthan their Spanish mates). Our study tries toextract and synthesize the results from thesewidespread sources with the aim of bringingsome light on this new area and show thestate-of-the-art in the question.
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According to Egland, Furst, Nolle, and Robert-son (1998), the beginning of e-banking in theUSA took place in 1995. It is true that somebanks opened their webs before, but if weaccept the definition of e-banking as the possi-bility of acting through the Internet (that is, thebank has to offer a transactional1 site), we can-not go further. Sullivan (2000) offers a verysimilar definition, distinguishing betweenInternet banks and Internet-only banks. At theend of 1997 there were 103 American banksoffering that service. During the first sixmonths of 1998 there was an amazing increaserate of 300 percent, reaching a total of 258 dif-ferent institutions. The figures at the end of1998 found 350, 650 at the end of June 1999and 1100 at the end of that year.
According to the research of the Office ofthe Comptroller of the Currency and devel-oped in Furst et al. (2000), there was a 54.2percent of US national banks offering a website; but just a tiny 20 percent of them wereoffering transactional financial services. Theirimportance was not worthless: they repre-sented the 89 percent of the total assets of thenational banks, and the 84 percent of thedeposits under USD 100.000. At the end ofSeptember 1999, maybe not all the US bankshad a transactional site, but those in place werefrom the big ones.
We will now stop for a while on the featuresof the Internet banks from an economic andfinancial point of view. Furst et al. (2000) offersome very interesting measures of the returnwhen comparing e-banks to traditional ones.The first research on the matter was publishedin Egland et al. (1998), where they did not findany significant evidence of differences frome-banks and banks from a financial perspec-tive. But Furst et al. (2000), mentioned before,did find some divergences when talking ofprofitability, efficiency or credit qualitydepending on the size of the bank. Forinstance, e-banks holding assets over USD 100millions are clearly more profitable in terms of
ROE, which is just the opposite for the banksunder that figure. There also are evidences interms of efficiency, measured as the ratio ofnon-financial expenses over the net operatingrevenue: here the differences lie on the clusterof small banks, with assets under USD 100millions. And finally, there is a better creditquality in, again, small e-banks than in those ofthe same size in the traditional business, withjust the opposite occurring in the banks assets’cluster between USD 1 billion and 10 billions.The researchers explain that the cause mightbe in the certainty that big Internet banks focustheir credit activity in credit cards more thannon-Internet banks do, consequently assuminghigher risks. Sullivan (2000), just taking intoaccount banks on the Tenth Federal ReserveDistrict, accomplished a similar research.2 Hedivided banks into four segments (CommunityBanks, Large Community Banks, RegionalBanks and Large Regional Banks, dependingon the size of the assets; see Sullivan (2000) p.2, Table 1), and found significant statisticaldifferences in terms of demographic features(for instance, Community Internet Banks weremore likely to be situated in urban areas thannon-Internet ones), some others related to themarket share and market concentration (just inthe segment of the Large Regional Banks, andonly in the urban areas). And finally, what ismore important from a financial perspective,they found no differences in terms of ROA orROE in any of the four segments. This is truefor banks (Internet or not) older than 2 years;those younger, so-called de novo banks, areexamined in detail and apart. In that case, hedoes find a significant difference in terms ofprofitability between those adopting an Inter-net strategy and those that do not, being higherbetween these.
Expertise is another point to be underlined.This can be shown from a double perspective,experience in financial business and experi-ence as a technological firm. In De Young(1999) and Furst et al. (2000) we can havesome responses on that matter. As it is easy tounderstand, new banks will be smaller in size,will have to assume high starting costs and
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they also will have to reach new clients withhigher expenses in marketing than thosepre-existing. In the income hand, they willhave to compete in prices, a question thatreduces margins. And there is another impor-tant point: new banks tend to use alternativeways (as the Internet) for delivering their prod-ucts more than the established ones, with theinconvenience of educating customers and thedifficulty of reaching big numbers during thefirst years. Focusing the analysis on the bankswith assets under USD 100 millions, newbanks offering transactional services throughthe www are less profitable and less efficientthan their non-Internet neighbors. But there isa reduction of the differences when talking ofthe same small banks with an experience of atleast three years in the banking market; theirefficiency may be poor, but not their profitabil-ity.
There is then the point of the experience ofthe bank as a tech firm, not just as a financialone. Furst et al. (2000) divide the institutionsinto three groups: banks not offering transac-tional services through the www, banks withan experience of at least one year on the trans-actional Internet business, and banks with aminor experience. In terms of ROE, they main-tain that there are no significant differencesbetween the three groups; but, on the otherhand, there are some in terms of accountingefficiency: mature e-banks are not less effi-cient than traditional ones, but new e-banksare.
It is De Young (2001a) who finds substan-tial differences between what he calls pure
play Internet banks3 and non-Internet banks.His research is the first specific one on thematter, and he outlines that these pure Internetplayers are less profitable than banks (playingon the Internet or not) having commercialbranches; in the case of an Internet bank, this iscalled “clicks and bricks” model. He states thate-banking is a business not quite different fromany other dotcom one: spectacular growthwithout profits. He points out that maybe hismodel is not enough reliable to state thate-banking is not financially viable, but the ideais displayed.
So the future is not as easy as it was havinga look just a couple of years back in time. It istrue that the accounts are growing, as Gómez,Inc. (2001) shows, stating that by August,2001, there were over 13.6 millions of Ameri-cans playing on the online banking field,almost doubling the figure of 7.5 millions bythe end of 1999; but other studies on the mat-ter, as the one from eMarketer (2001) are notas confident on the future, an opinion sharedby De Young (2001b). For the latter Internet isjust a new distribution channel, and that is afact that banks must consider; the economiststates that it is unlikely that traditional brickand mortar banks will retain an importantshare of the market without offering an Inter-net option to their customers. But at the sametime, he believes that just few pure-play Inter-net banks will survive, so that he foresees afuture with a handful of virtual banks, anotherof traditional non-Internet-at-all on the otherextreme, and a wide majority of click and mor-tar banks. De Young does not forecast any fig-
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ures, but eMarketer (2001b) does. Thisresearch company is the most conservativewhen projecting numbers to the future, asTable 1 shows. And a research by JupiterMMXI, quoted by Ganar.com4 in its edition ofAugust, 30th, 2001, stated that Americans weredecreasing their visits to pure play Internetbanks face to the sites of click and mortar ones,from 1.2.millions by July, 2000 to 1.1 by oneyear later, a rate of -8 percent.
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South America presents a difficult position.If the differences between countries are widein terms of access to life essentials, it could notbe otherwise in terms of Internet access. Theestimated number of Internet users by the endof 2001 is 15.3 millions for a population over350 millions, a tiny 4.3 percent, according toeMarketer (2001a).5 And just three countries(Argentina, Brazil and Mexico) accounted a 65percent of the total amount. The effort is beingmade, but it is true that there are other priori-ties when compared to the PC penetration rateor the number of telephone lines. Chili isanother country where Internet has a good pen-etration rate, and its impact on the financialsites is increasing at three-figures rates;according to the Supervising Authority, quotedby Ganar.com on July, 14th, 2001, visits to thefinancial sites jumped from 1.7 millions byJune 2000 up to 4.9 millions one year later.Transactions increased at a rate of 192 percentin the same period, accounting over 10 mil-lions in June 2001.
The situation in Argentina is similar. Or atleast it was, because there is no information atthe time the paper is being prepared about theeffects on the online banking system of thefinancial corralito imposed by the Duhaldegovernment. Prior to that date, almost twothirds of the Argentinean banking industrywere offering home banking to their custom-
ers, according to Balseiro, Selas, andKotzrincker (2000), with a very tiny response;it would seem that banks were using Argentinaas a trial field for developing and trying newsystems. Easy Banking, the first bet of theBBVA-Banco Francés, one of the biggestbanks in the country, was a successful phonebanking trial that has been followed byFrancés Net; Citidirect by Citigroup, BostonAccess by Bank of Boston, Rio Home Bankingby Banco Río, or e-galicia.com by Banco deGalicia are examples of how Argentineanfinancial institutions are trying to serve anincreasing demand.
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As in the case of the States, we cannot offeran homogenous figure for the penetration rateof online banking; but there are some that seemto reveal a constant increasing rate on the num-ber of users.
For instance, and according to ForresterResearch, quoted by Ganar.com last December2001, 42 millions of Europeans were activeusers of online banking; this represents a 14percent of the adult European population. Andthey forecast over 110 millions users by 2005.Nordic countries are the most advanced in pen-etration rates, and over the half of Swedish andFinnish Internet users also bank online. On theother side, the same report states that just aquarter of Greeks and Italians bank online,between Internet users. JP Morgan’s OnlineFinance Europe presented quite smaller pene-tration rates just a year before, but referred tothe ratio of online banking customers over thetotal amount of the customers. Nordic coun-tries had the highest penetration, followed bySwitzerland. Italy, with a 3 percent penetra-tion, and France, with a 4 percent, would be thequeuing countries. In Table 2 we can have alook at the different figures of both studies.
Datamonitor (2001) shows confidence onthe future of e-banking, but foresees that thedeath of traditional branches is far from immi-nent. Their report states that 79 percent of
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Europeans prefer a person-to-person relationwhen talking to the bank, for just a 4 percentpreferring the Internet channel. Internet TVand mobile phone seem to be the next chal-lengers in terms of distant banking; theyexpect an increase from 750.000 digital TVbanking users and 1.1 millions mobile phonebanking users until almost 10 millions for theTV scenario and over 27 millions for themobile one by 2005. We will later see that thefirst European non-Internet bank in terms ofthe ratio Internet users over total amount ofcustomers, the Spanish Bankinter (accordingto JP Morgan), is handling a 2 percent of itstransactions through mobile phones by the endof 2001.
The figures offered by the Central Bank ofItaly last October 2001, regarding the evolu-tion of online banking during 2000, shown avery important increase during that year; 2millions of Italians, the 6 percent of the totalamount of customers of the banking system,were using online facilities. An interesting fea-ture of the Italian banking system, when com-pared to its neighbors, is the high number ofbanks and thrifts. The Central Bank of Italy got809 answers from different financial institu-tions, and 592 of them were offering an elec-tronic site. Unfortunately, the report quoted byGanar.com last 24 of October does not distin-guish between transactional and non transac-tional sites.
A very interesting study on the subject inItaly is due to Masciandaro (2000). He revealsimportant differences between e-banks and tra-ditional ones in terms of location, size, and
ROE. Italian banks offering an Internet site aremostly located in the North, have an amount ofassets 27 percent higher than the average onthe industry, 30 percent more branches (show-ing that first movers in Italy have been bigbanks, an interesting difference with the Span-ish situation, as we will later see), they holdsecurities for safeguard and administration in a21.5 percent over the average of the Italianbanking system, and their ROE is 17 percenthigher. But the main target of the study was todiscover what variables determine the speed ofentry into the online market. Prof. Mascian-daro finds that there is an strong, significantinverse correlation between the amount ofsecurities in custody and the delay of marketentry; other significant variables were theoperating margin and the interest margin.
According the Spanish Internet Users Asso-ciation, 20.4 percent of the Spaniards (over 7millions) over 14 have access to the Internet asby April 30th, 2001. This represents a jump of80 percent from the figures of just one yearbefore. It is expected that by 2004 2.64 mil-lions of Spaniards will be e-banking users.Almost 2 millions of households have nowa-days an Internet connection. Relating thesefigures to our topic, and according toNetValue, one of the Internet consultinggroups, Spanish people spent an average of 56minutes in Internet financial sites during Janu-
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ary 2001, which place them on the 6th place inthe world ranking. Over 1.3 millions of peoplevisited financial sites during the month, a 35percent of the Internet private connections.The figures in May were quite similar, but datareveal that over 20 millions of Europeans vis-ited this kind of pages, with Germans headingthe ranking of time spent in the visit and fol-lowed by Spaniards and Italians.
The first experiences in electronic bankingin Spain started more than 10 years agothrough the property PC system. But the pene-tration was very tiny, representing just a 3 per-cent of the total banking transactions by theend of 2000, with an expectation of a 7 percentby 2004. At the same time, a much youngerexperience as e-banking is expected to jumpfrom 1 percent to 10 percent in the same periodof time. We should also add the 2 percent oftransactions through alternative intelligentdevices (such as mobile phone, TV, PDA, …)expected for the same date.6
These figures are supported by the bet ofthe financial institutions: the first Spanishbank, BSCH, paid over USD 575 millions forthe Argentinean site Patagon.com in March2000 and, just three months later, establishedits stand alone pure play Internet bank, Pata-gon.es. Mr. Corcóstegui (2001), CEO ofBSCH,7 points out five reasons for the increaseof the share of e-banks:
1. the nature of the financial activity,which allows the integration in theInternet without significant problems;
2. the fact that customers are attracted bythe new channel, with the possibility ofaccessing to and acting with the bank atany time and place;
3. a higher efficiency of the channel whencompared to others,8 traditional or not,and what for him is the major incentive:the possibility of jumping from the cur-rent 160.000 sale points (branches) inEurope to over 300 millions allowed bythe www;
4. the progressive reduction of the riskssustained by a new frame in the legal
regulations and an increase of the secu-rity in the www; and
5. the own technological development ofthe Internet.
In March 2000 BBVA9 launched his newstand-alone e-bank, Uno-e, along with TerraLycos and First-e (which sold its part during2001): a financial supermarket offering prod-ucts of almost any financial institution. Theparent, BBVA, has its own portal10. Themodel is similar to Patagon’s, and differentfrom the one of bancopopular-e.com, anotherindependent chartered branchless bank. Butthe first Spanish bank that offered financialservices through the Internet was Bankinter,the bigger of the medium-sized banks. Theybegan offering free access to the Internet totheir customers in 1996, as well as free e-mail.During 1997 they opened their Internet trans-actional branch, and they later changed theirname on the www, working on a trade namebasis: ebankinter.com. According to JP Mor-gan’s Online Finance Europe, it is the firstnon-Internet European bank in terms of Inter-net customers over total customers: 20 percentby March 31, 1999, and 37.5 percent by June2001, over a total amount of almost 1 millioncustomers. New customers come in a 50 per-cent from the Internet channel, for just a 36percent coming through the street branches.Transactions by the Internet exceed nowadaysthose made through traditional branches.According to the results of 2001, transactionsthrough the web accounted for a strong 40 per-cent, jumping from a 27 percent one yearbefore; and another 2 percent is provided bymobile phone banking devices. 52 percent oftheir customers were using branches, phoneand Internet as their usual way of contact withthe bank. In words of CEO Arena, “pure Inter-net banks will have difficulties when compet-ing with multichannel banks” (16 January2002, during the presentation of the 2001results; on news); just one year before, hereferred to branches as “advising and per-son-to-person centers” (Arena, 2001).
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Let us now have a look at the figures of thee-banking business in Spain. At the end of2000, there were two clearly separate groups:virtual banks and traditional banks and thrifts.The first group was made up by five institu-tions, bancopopular-e, evolvebank, Ing-Direct,patagon and uno-e; they all allowed transac-tional operations through the Internet as wellas a call center, and their main feature was thelack of street branches. The situation haschanged nowadays, and Ing-Direct and pata-gon now operate with few but existing com-mercial branches. But anyway we will payattention to the figures of the whole group.Evolvebank has a special situation because it isan English chartered bank, and its data havebeen excluded of the study.
As by December 31, 2000 the four banksrepresented a 1.2 percent of the total bankingmarket share, with liabilities over Euro 3.000millions—with just one of them, Ing-Direct,holding Euro 1.600 millions. These figuresimply an increase of 4 times the share in justone year and they represent the 7.3 percent ofthe new banking deposits; again, Ing-Directheaded the pack, with a 30 percent of the rate,establishing itself just behind the two biggerbanks and the two bigger thrifts. Figures showthat on the 12 months from July 2000 to June2001 they attracted 12.4 percent of new bank-ing deposits. By the end of Q2 2001 the sharejumped until 1.81 percent, at an increasingyearly rate of 100 percent, and the volume ofliabilities over Euro 5.5 billions, a yearly rateof 167 percent. They were holding over190.000 customers by the end of 2000, with athird for Ing-Direct, a 31 percent for patagon, a27 percent for Uno-e and a 9 percent for ban-copopular-e. As by 30th of June, 2001,Ing-Direct has almost 300.000 customers,Uno-e announced its first 100.000 customers,with 80.000 of them active, Patagon has over60.000, and bancopopular-e 33.000.
During the first semester of 2001, two newbanks have entered the Spanish Internet bank-ing field, Activo Bank and AllFunds. This oneis not a commercial one, but the first one hascome into the scene with a huge marketing
effort and a target of 150.000 customers for2004, the 15 percent of their prospected poten-tial customer portfolio. By the end of Q2 2001it shared a tiny 0.1 percent of the volume han-dled by virtual banks, with an amount of Euro4.6 millions; and considering that it has startedits job during May, it seems the effort isworth.
The battle is hard because the market isnarrow; during 2000, bancopopular-e, pata-gon and uno-e lost around Euro 84 millions,according the Spanish Banking Association;during the first quarter of 2001, these threeplus the two new ones lost Euro 14.45 mil-lions. The aggregated figure by September,2001 accounted losses of Euro 55.6 millions.
The other group is made up with traditionalbanks and thrifts that offer Internet to theircustomers as an alternative channel for deliv-ering their products. Thrifts have around 1.6millions of online customers by the end of2000; and between banks, BBVA had around300.000 customers, Banesto 283.000,Bankinter 270.000; this one has by the end ofthe first semester 2001 almost 350.000, andthe smallest of the big banks, Banco Popular,with over 4 millions customers, stated that468.000 of them (11%) are users of the Inter-net facilities. BSCH didn’t offer any informa-tion about the Internet customers, butaccording to a Datamonitor report (05.03.01)it should be the first bank in Spain and thefourth in Europe. According to a report byNetValue quoted by Ganar.com on Septem-ber, 10th, 2001, over 1.1 millions of Spaniardsvisited online banking sites during July 2001;of them, over a 55 percent visited the portalsby the biggest thrifts (La Caixa and Caja-madrid) and BSCH attracted 153.000 people.With over 5 millions customers (for a totalpopulation of 40 millions), over 1700 streetbranches, Cajamadrid announced 312.000online customers by Q1 2001, at an increasingrate of 257 percent over the figures of one yearbefore.
According to the researches by NetValueand Jupiter Media Metrix, over a million ofSpaniards visited financial portals during Jan-
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uary 2001, with an increase of 246 percent intime spent in connection in the period Sept 00– Jan 01 (up to 54 minutes), the first relativeincreasing rate in the world. Of them, over an85 percent were visiting portals by onlinebanks, a figure that jumped up to 1.1 millionsduring July 2001; and this one is not a goodmonth for measuring Internet connections,because a lot of Spaniards take their vacationsduring that month. According to the Datamon-itor report dated March 5, 2001, 29 percent ofSpanish Internet users were also e-bankingcustomers, preceded by Swedish (44 percent),Danish (41.6 percent, according to Jupiter’sreport on January 14, 2001) and Germans (34percent), and followed by French (20 percent),and British (16 percent); the average of Euro-pean users will exceed a the end of Q1 2001the rate of Americans, around 18 percent. Onthis respect, IDC Research forecasts 22.8 mil-lions of Americans using online banking by2004, a figure that eMarketer reduces until18.3, as Table 1 reports.
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The success of e-banking is almost out ofdoubt. But it depends on the strategic modelbuilt, and in any case it would have to meetsome questions, as the risk of cannibalization,the increase of the penetration rate, the trainingof employees, the education of customers(from a double perspective: the surpass of thebranchless system and the increase of thetrust), the legal regulation of the activity andproblems derived of the globalization of theeconomies (with faster, cheaper, easier capitaltransactions, and an increasing difficulty forfollowing them).
Cannibalization is the fact that a new standalone Internet bank unit gets a rate of its cus-tomers from the parent's one. The experts seethis as one the main dangers of the business.The case study of mbanx (JP Morgan's OnlineFinance Europe, p. 42) is significant. In Octo-ber 1996 the Bank of Montreal launched thisstand alone and separately branded Internet
subsidiary, with a target of 1 million custom-ers. Three and a half years later they had just170.000, and in August 99 both electronicofferings, the parent one and mbanx, werefolded into mbanx Direct. Even the addressmbanx.com doesn’t exist nowadays. One ofthe main reasons of the fiasco was cannibaliza-tion: almost 80 percent of the accounts werecustomers from its parent, who wanted toretain their branch privileges and captureattractive online rates. This situation is similarin bancopopular-e, independently charteredbut owned by Banco Popular, another bigSpanish bank; but in respect to this one, itsManaging Director stated that at the end of2000 only a discrete 6 percent of the customerscame from the parent bank. And when askedabout Uno-e, the stand-alone Internet bank ofthe Spanish BBVA and Terra-Lycos, manag-ers from BBV Banco Francés, the Argentineanbank of BBVA, saw on it a competitor of theiralternative delivering system, Francés Net,according to Balseiro et al. (2000).
One of the main problems is the penetra-tion. According to JP Morgan estimates, onlinebanking in the USA will raise from the current15 percent of online households to a 33 percentin 2004.
These data are not comparable to thoseoffered about Europe, where we have the realpenetration rate estimate as a ratio of bank cus-tomers online over total bank customers. In the2000-2004 period, France will grow up from atiny 4 percent to a 21 percent, Germany from12 percent to 25 percent, Italy from 3 percentto 16 percent, the Netherlands from 8 percentto 24 percent, Sweden from 26 percent to 50percent, Switzerland from 19 percent to 36percent, UK from 10 percent to 22 percent, andSpain from the present 6 percent to a 15 per-cent. As we can see, at the moment Spain is notin a bad situation when comparing to its neigh-bors, but if projections are right, at the end ofthe reference period it will be queuing thepack. The reason is neat. The penetration ofe-banking is directly related to the householdpenetration of the Internet. The 2001 expectedhousehold Internet penetration rate is an 18
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percent for Spain, faced to a 32 percent forFrance and a 41 percent for Germany and theUK. But while France will equal its own rate tothose of UK and Germany in 2010 to a pene-tration of 95 percent, Spain will maintain 51percent. In Figure 1 we can see the evolution ofthe Spanish rate compared to the average of theother three neighbors.
Other studies go on the same direction.BSCH—Andersen Consulting (2000) pros-pects a 24.2 percent Internet penetration by2003, with e-banking representing a 25 percentamong Internet users and 6.1 percent amongthe total population.
Banks that have betted on the Internet arethe first concerned, and they have reacted inmany different ways. They offer renting, leas-ing, tailor-to-measure credits, and Bankinterwent further, offering the devolution of themonthly paid interests if the customer con-nected at least one a month to have a look intohis accounts.
The second of the challenges is directlylinked to this one. Every bank that wants toplay on the Internet field has to have a special-ized task force, and the training of employeesis one of the main transition-to-the-Internetcosts. The second Spanish thrift,11 Caja-madrid, has launched a specific portal for itsemployees and their families, e-personas
(e-people), following they get familiar to theuse of new technologies.
Employees and their families are one of themain links on the value chain of the business,but customers are the key part. And the prob-lem facing them is double. E-banks wouldhave to surpass the double challenge of trustand a branchless system.
Starting by this one, Constanzo (2000) andO’Sullivan (2000) have pointed out the diffi-culties of growing without traditional streetbranches. Also, Bank Technology News(2000) stated that customers wishing elec-tronic billing have a well-marked preferencefor traditional branch banks. Masciandaro(2000) offers a very similar conclusion on theItalian field. This has lead many financial insti-tutions (not just banks and thrifts) to the refer-enced clicks and bricks model. One of the firstvirtual Spanish banks, Ing-Direct, began dur-ing Q1 2001 opening what they call “cafés”, amixture of branches and coffee-shops, wherecustomers and non can have something todrink, talk, chat, access to their accounts, andask whatever to the employees of the bank.Patagon, the pure-play Internet bet of SpanishBSCH, has by the end of 2001 around 10 streetbranches. Another significant case isBankinter, the oldest experience in e-bankingin Spain. Instead of opening a stand alone
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Internet bank, they switched to a trade namestrategy, e-bankinter.com in the www, trans-forming their over 200 street branches into“advising and person-to-person centers, andplaces to deliver financial products and ser-vices of a certain complexity”, according to MrArena (2001), CEO. A report from Cap Gem-iny Ernst and Young—CGE&Y (2001) pointsout interesting findings on the same direction.According to data provided by 120 financialinstitutions from 13 countries around theworld, street branches will keep a 60 percent ofthe total amount of banks sales by 2004. Andthey conclude that bank will tend to transformtheir street branches into more fashionablestores, with the shape of a boutique, wherepeople will be tempted to spend more timehaving a look into the offering they get.
On this respect, an European research byShandwick International (2000) showed that66 percent of the Spaniards, and 53 percent ofEuropeans, state they will never use e-bankingfacilities. But the same research guesses that itis in Spain where the situation can change inthe short term; the reason is that, of the referred66 percent, just 11 percent alleges questions oftrust, faced to the 45 percent of Germans, 41percent of Dutch and 31 percent of French andBritish. The main reason alleged by Europeanpeople when asked why they do not bankonline is that they prefer dealing with someonein person (45%), and just 30 percent are con-cerned about security measures. And accord-ing to Deloitte Consulting (2001), two thirds ofconsumers do not pay attention to online bank-ing facilities. The over 200 worldwide peoplesample shows that the main valued factors stillperson-to-person relation and a wide net ofstreet branches. The report considers that cus-tomers have fallen into the cost trap, asking fora personal touch in their relation with the bankbut not willing to pay for it. This shows that aneffort has to be made by entities in the sense ofteaching customers the advantages of the digi-tal relationship.
The matter of trust is directly linked to theperception of security among customers.According to Caro and López-Zafra (2001),
investment in security is around 10 percent ofthe total investment done by the firms in thee-business area. Some studies state that itshould increase by three times. At the moment,all banks use the 128 bits SSL protocol (Secu-rity Socket Layer), which prevents the inter-ception of data travelling through the www.But it seems that the solution will come withthe arrival of the electronic signature, becausethere is an asymmetry problem in the relation-ship between the bank and its customers: thesehave the almost complete certainty of who is infront of them, something that is not true fromthe bank’s perspective. While this comes,banks should have to improve the trust of cus-tomers with privacy statements. If during asurvey by the Federal Trade Commissionshowed that only a tiny 17 percent of theAmerican financial portals had something onthis respect as by Q1 1998, the improvementduring the year was huge: as by June 30, therewas a 40.4 percent, and a 51.6 percent inNovember. Furst et al. (2000) pointed out that84 percent of American banks on the Internetwere offering enough information on the pri-vacy matters as by Q3 1999.
The situation in Spain is quite good. Ofcourse, the number of banks and thrifts ismuch lower, but after visiting (Q1 2001) thedifferent sites, all the big ones plus the biggermedium-sized ones plus the four working vir-tual banks offered easy-to-reach informationon the matter.
Another challenge for e-banking is the onerelated to the legal regulation of the activity,which travels on behalf of the globalization ofthe economy. Besides of the matters outlinedbefore (privacy, electronic signature), theElectronic Bank Group of the Basel Commit-tee points out the necessity of a “cooperativeapproach” in the supervision of the bankingactivity through the Internet in the way to sur-pass the different national regulations, asstated on OCC (2000). According to the Presi-dent of that Group, Mr. Hawke, Internet bankis a special challenge for the international banksupervising organizations, because it enablesbanks increasing their customer base out of
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their natural boundaries. The rivalry betweenbanks (and no banks) increases with the disap-pearance of the borders, and this could lead tounfair trade practices. Vigilant of the problem,and with the aim of increasing their customers’calmness (and, of course, with the one ofavoiding capital escapes to other countries),the Federal Deposit Insurance Corporation, onbehalf with the Federal Reserve Bank of NewYork, the Office of the Comptroller of the Cur-rency and the Office of Thrift Supervisionpublished a very simple 11-pages pamphlet,“Tips for Safe Banking Over the Internet,”where they provide information about theactivity. As stated in the Preface, it offers aguide for the Internet banking user for discov-ering whether the bank is legitimated or not topractice the activity, how to keep informationconfidential, what are the rights of the user as aconsumer and where to go if help is needed.The spirit of the “cooperative approach” is theattempt of finding solutions that would makeunnecessary new national regulations thatwould obstruct free trade.
The previously quoted Group also developssupervising practices that would settle the linesfor fair Internet banking activities. They pre-tend to supply proceedings to internationalcommunity on risk management in e-banking,emphasizing on commercial trade. Since 1996,the OCC has published a dozen of reports onthe online banking practice question, includingmatters on electronic security, privacy, andrisk management. In 1995, according to Crede(1995), the necessity of an international regu-lation of the payment systems was seen as oneof the main questions to improve e-commerce.The paper quoted a report from the BritishIntelligence stating that around USD 500 bil-lions a year was the money laundering busi-ness through the Internet. It seems so that somemeasure on the question would be very useful.
A new May 2001 report from the BaselCommittee quoted by the vice-governor of theSpanish Central Bank during a presentationlast June 2001 states that banks have tostrengthen security questions and improve
mechanisms with the target of increasing cus-tomer confidence.
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1. In its “Comptroller's Corporate Manuel,” theOffice of the Comptroller of the Currency(OCC) has published in January 2001 “TheInternet and the National Bank Charter”, defin-ing four categories of electronic banking: infor-mational web, transactional web, wireless andPC banking. We will pay special attention tothose offering a transactional site.
2. The Tenth District consists of Oklahoma, Kan-sas, Nebraska, Wyoming, Colorado, westernMissouri and northern New Mexico.
3. De Young identifies 6 pure play Internet banksand thrifts in the States by June 30, 2000:Ebank, First Internet Bank of Indiana, Gay andLesbian Bank, Marketplace Bank, NetBank,and Principal Bank. If by December 31, 2001,we could define 4 pure Internet players inSpain—Ing-Direct, Patagon, Uno-e and banco-popular-e-, the situation as changed nowadays,and during the first semester of 2001,Ing-Direct and Patagon have opened commer-cial branches, called “cafés” by the first one. Atthe same time, two new Internet banks haveentered the field: ActivoBank and AllFunds;this one is not a commercial one.
4. Ganar.com is an Spanish site which specializeson the New Economy field.
5. Nua Internet Surveys increases the figure to the25.3 millions as by August, 2001.
6. Vert, A (2001). “Del martini Banking ale-banking”, Tiempo magazine, e-banking spe-cial; data from Ernst and Young.
7. Banco Santander Central Hispano is one of the15 major banks in the world, with presence in42 countries, leader in South America, the sec-ond bank in EuroStoxx 50 by market capitali-zation, and with over 35 millions of customers.
8. Remember De Young's for a sensu contrarioopinion.
9. With assets over Euro 315 billions, it is the sec-ond Spanish bank and one of the leading onesin Europe; in December 2000 it was awarded“best world bank of the year” by Forbes maga-zine.
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10. This leads to one of the main problems ofe-banking: the risk of cannibalization. We willgo over the subject later.
11. In Spain, thrifts hold over the half of theaccounts of small investors.
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Balseiro, A., Selas, I., & Kotzrincker, J. (2000).Banca Online. El Estado de la Cuestión.Retrieved November, 2000, from http://www.baquia.com/com/20001016/art00010.html
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