OpEd: Internet Economics 101: The ABCs for Banking

Banks, brokerages and mutual fund providers, among others, are introducing new products and services for electronic markets. While banks have been working furiously to position themselves to provide electronic commerce, a rather unkempt clan--Internet commerce providers--has entered the scene. Internet commerce will affect financial markets in many ways because of three underlying principles: It is less expensive to create a presence, the presence can impact business globally, and the impact can occur almost instantaneously. While there are certainly many opportunities for new products and services, there are also new risks. Banks have traditionally offered customers a sense of stability, even while operating in rapidly changing electronic markets. What must bankers learn to offer Internet services warranting similar levels of customer confidence? Bankers may choose to heed the call of open interfaces and retool their systems and personae from staid providers of a stable suite of services, and embrace the Internet. But security remains a pressing issue. While new security mechanisms are being developed at a furious pace, hackers still inhabit the Internet domain. Information security for Internet commerce is vital and yet is inhibited by laws attempting to safeguard society against other threats such as those from organized crime and terrorism. But if the best security is available outside the United States, what will that do to the U.S. financial services industry?

The global Internet economy will only complicate the already difficult questions of jurisdiction and regulatory uncertainty. It is very possible that a Web site may reside in a country that has regulations favorable to banking. This is not new to banking because countries such as Switzerland have already established a perceived global comparative advantage in privacy and security. But now the Internet can enable all Americans to have a Swiss bank account, just as Security First Network Bank has become an alternative to a community bank in some markets.

The impact of global Internet commerce will be the acceleration of disintermediation, or removal of financial intermediaries who facilitate a transaction between a company and its investor. This may lead to more stock offerings where a company sells shares directly to investors.

Although there may be problems with security and acceleration of disintermediation, there are also new opportunities for banking and Internet commerce providers. New and enhanced services to existing customers for global, timely information and transactions are possible. Banks that have better services can compete with local banks by using the Internet to maintain contact with their customers. Banks can locate where regulations are most favorable for their services. And the Internet may lower barriers that formerly inhibited new customers from trying other banks' services.

Underneath these issues affecting banking services is the complex Internet infrastructure. The economic, technical and policy framework for the Internet is not only difficult to grasp, but also in a state of constant flux. Bankers in any other context would want to understand the business environment in which they are operating, or a market they intend to enter. For Internet banking, the ABCs of Internet economics are unknown, let alone what deeper issues may mean for bankers' business strategies and pricing models. Having read alternatively that the Internet will either collapse from overuse, or that exponential growth will continue indefinitely, what is one to believe?

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