Abstract
Information and banking technology have combined to throw the retail banking business model into disarray. Many predicted that lower cost online-oriented services such as Citibank’s Citi f/i venture would dominate the retail banking market and drive out high cost old technologies. The subsequent failure of Citi f/i and other virtual banks raises questions about how technology choice affects retail banking competition: Under what conditions would an online-only banking strategy be successful? When can a bank deploy both old and new technologies and still be competitive? Can an ATM network substitute for a branch network? Do customers’ attitudes about technology affect banking strategy? We use an economic model of a competitive retail banking market to address those and other questions. Our model allows banks to choose their technology, including establishing separate branch and ATM networks or relying on third party ATM networks. We also include customers that have differing attitudes toward technology. Our analysis suggests that customer preferences, rather than technology cost structure, drive the evolution of banks’ strategic technology choices. Also, banks in our model tend to deploy ATMs in the same numbers as branches, despite ATM’s cost advantages. Finally we show that virtual banks will remain unprofitable until a much larger proportion of the population is comfortable with online bank transaction technology. These results suggest that banks should carefully study their customers’ preferences to align major strategy shifts with customer attitudes.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Arrow, Kenneth J. and Hahn, Frank H., General Competitive Analysis, North-Holland, 1971.
Bauer, James L. “Distribution 2000: Developing and Implementing Strategies for Retail Financial Institutions” Lafferty Publications, 1995.
Beato, Paulina, “The Existence of Marginal Cost Pricing Equilibria with Increasing Returns” The Quarterly Journal of Economics, Vol. 97, Iss. 4, November 1982.
Byers, Reynold, Freimer, Marshall, and Lederer, Phillip J., “Retail Banking Choice of Distribution Strategy in a Competitive Market”, Working Paper, 2004.
Chelst, Schultz and Sanghvi, “Issues and Decision Aids for Designing Branch Networks” Journal of Retail Banking, Vol. 10, Iss. 2, Summer 1988.
Eliopoulis and Kouzelis, “Branch Planning Through Decentralized Marketing and Regional Analysis Studies,” European Journal of Operational Research, Vol. 30, Iss. 1, June 1987.
Harker, Patrick, “Introduction: the Service Quality and Productivity Challenge,” in: The Service Quality and Productivity Challenge, Patrick T. Harker (ed.), Kluwer Academic Publishers, 1995, 1–10.
Hopmans, “A Spatial Interaction Model for Branch Bank Accounts,” European Journal of Operational Research, Vol. 27, Iss. 2, November 1986.
Power, Carol, “Citi f/I Closure Shows Branches Still Matter: Internet-only banks seems to be losing steam,” American Banker Magazine, June 27, 2000.
Prasad, B. and Harker, P., “Pricing Online Banking Services Amid Network Externalities,” Working Paper, 2000.
Stoneman, Bill, “Online Transactions Finally Reach Critical Mass,” American Banker Magazine, July 23, 2002.
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2007 Springer Science+Business Media, LLC
About this chapter
Cite this chapter
Byers, R.E., Lederer, P.J. (2007). Channel Strategy Evolution in Retail Banking. In: Apte, U., Karmarkar, U. (eds) Managing in the Information Economy. Annals of Information Systems, vol 1. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-36892-4_14
Download citation
DOI: https://doi.org/10.1007/978-0-387-36892-4_14
Publisher Name: Springer, Boston, MA
Print ISBN: 978-0-387-34214-6
Online ISBN: 978-0-387-36892-4
eBook Packages: Business and EconomicsBusiness and Management (R0)