The rise of the Internet has fueled an important question across the banking industry of whether it is time to renounce to the branches and provide banking products & services solely over the Internet or combine clicks’ n bricks.
The objective of the paper is to compare two business models: the “click and mortar” model that complements both classical branch banking and online facilities with the one that aims using exclusively cutting-edge Internet technology, the so called: pure Internet banking.
Keywords: Internet banking, performance, client orientation
The current global economic situation determined banks to focus on performance and on increasing the revenue brought by the existing customers. Given the context, banks tend to reorient towards the cost effective distribution channels, in order to minimize distribution costs.
Probably the most important cost effective distribution channel for the banking sector is the Internet. That is why, since the rise of Internet, bankers had to decide whether it is time to renounce to the branches and provide banking products & services solely over the Internet or combine clicks’ n bricks.
Both alternatives have strengths and weaknesses, advantages and disadvantages.
The set of advantages that the use of Internet might bring for banks is quite consistent. Among them (see fig. 1), we mention: the almost unlimited mobility that such channel offers to the bank’s clients; the multiple possibilities that exist in terms of interconnecting the Internet-based financial platforms with other systems; the reduced costs that such a distribution channel implies etc.
On the other hand, the complexity and dynamism of the Internet also implies considerable risks.
Internet banking products bring a high level of transactional risks, particularly if such a line of business is not adequately planned, implemented and monitored.  Transactional risks are mainly arising from fraud, error and the inability to properly manage confidential information.
Fig 1. Internet Banking’ s main advantages 
Nowadays, all Internet banking applications must meet a minimum set of security requirements, such as:
communications’ confidentiality and integrity
data’s integrity and confidentiality
authenticity for all parties involved in transactions
protection of personal data
protection against identity substitution and information’s transmission under false identity
protection against interception of information transferred between the client and the bank
traceability of transactions
business continuity for all services offered to customers
prevention, detection and monitoring all unauthorized access in the system
restoration of the system’s information in case of natural calamities or unpredictable events etc 
In considering the merits of branch banking, we cannot do better than remember the advice given to bankers by Mr. Rae in his excellent work, The Country Banker. He remarks that no bank ought to open a branch unless possibly for the following reasons:
1st. It should be advantageous for the customers of that bank.
2nd. There should be a possibility of new business being obtained.
3rd. That the branch may act as a connecting link to other branches.
Possibly the greatest use of branches is that they find an outlet for surplus capital. Thus if money cannot be employed to advantage at one branch, yet there might exist a demand for capital at another, and consequently none of the resources of the bank remain unemployed. If the surplus funds of a bank can always be utilised at a profit, it follows that a higher rate of interest can be given for deposits.
For small towns a branch is more advantageous than any other method of gaining market share, because a limited customer environment can be better served by a focused and personalized approach. Also, there is no doubt that the establishment of branches by the existing banks can be a method of preventing competition from opening branches in the same area.
Above all, security issues can make customers consider that branch banking is superior to Internet banking, because there is better trust in the traditional transactional system.
Body of Paper
Pros and Cons of Internet banking
Lowered transaction costs: Internet is probably the most important cost effective distribution channel for the banking sector, primarily due to two factors: widespread Internet access and its low costs, which minimizes transaction processing costs, and the reduction of the number of brick and mortars branches required to service an equivalent number of customers, which dramatically lowers overhead costs .
Convenience: Unlike a bank’s branch, Internet banking sites never close; they’re available 24 hours a day, seven days a week, and they’re only a mouse click away.
Ubiquity: If a money problem arises while clients are out of their residence state or out of the country, they can log on instantly to the Internet banking application and take care of business-24/7.
Transaction speed: Internet banking sites generally execute and confirm transactions at or quicker than ATM processing speeds.
Efficiency: Clients can access and manage all of their accounts, including Individual Retirement Accounts, CDs, even securities, from one secure site.
Effectiveness: Many Internet banking sites offer sophisticated tools, including account aggregation, stock quotes, rate alerts and portfolio managing programs to help clients manage all of their assets more effectively. Most are also compatible with money managing programs.
Higher loyalty rates: Pure Internet bankers show slightly higher loyalty rates than their multi-channel counterparts. According to a study conducted in 2000 in the USA, 84 percent of Internet bankers had only one banking relationship, while 79 percent of multi-channel bankers had one relationship.
Younger public: Pure Internet bankers are more youthful than the multi-channel bankers. In accordance with the above mentioned study, forty-four percent of pure Internet bankers were 35 and younger, compared to 30% of the multi-channel bankers.
Trust: Trusting an Internet banking system is an issue for two main reasons: identity theft and operator error. If clients use a non-secure wireless Internet connection, it might not be a good idea to use online banking. It’s quite easy for a savvy ID thief to view the personal information of the clients. In regards to operator error, some users worry that they might have pushed the transfer button too much, or not enough.
Risks: Internet banking sites bring a high level of risks, such as: operational, legal, reputational or systemic risks and even strategic risks. Internet banking does not necessary open up new risk categories, but rather accentuates the risks that any bank faces.
Security controls: Security controls need special attention because of the open nature of the Internet and the pace of technological change. Specific focus areas include:
Authentication-This means ensuring customers are verified and their identities established before conducting business over the Internet. Passwords, biometric methods, challenge-response systems, public key infrastructure are some of the ways of strengthening authentication. There is a growing trend towards single-sign-on applications, where the customer needs only a single ID to access his entire relationship. These increase the risk of compromise.
Nonrepudiation-Banks should make certain that customers who transact on the Internet cannot later deny having originated the transactions. Using techniques like PKI (digital certificates), strong nonrepudiation can be achieved. However, legal enforceability in many countries is still suspect.
Segregation of duties-As in any traditional process, segregation of duties is vital to prevent perpetration of fraud by any one individual.
Delays in account activation: Customers may need to face a waiting period between signing up for Internet banking and receipt of the ID and password necessary for account activation and also make other arrangements in case their access is temporarily denied because of various reasons. Also, the clients might need some time to get accustomed with the bank’s website and set up account information.
Delays in processing the payments: Even if the Internet banking platforms can be accessed 24 hours / day, the majority of the payments are processed only within the working hours of the banks. That is why, if clients choose to pay bills online, they have to make sure that recipients are capable of processing electronic payments in time. Otherwise, it may take several days for the payments to be credited to the right accounts, which could result in accumulated late charges.
Lack of official proof of payment: If something goes wrong with the online money transactions (errors, late charges etc), clients might need official proofs of the payments they did. The fastest way to obtain such a proof is by printing out a hard copy of the payment order directly from the system. Unfortunately, in most of the cases, the printings are not considered official proofs so in order to get some; clients will have to visit the nearest bank’s branch.
Technical problems: Any system that comprises complex technology needs maintenance and it is prone to occasional technical problems. Under such circumstances, Internet banking applications might be temporarily unusable, which means that the clients cannot access their accounts.
Rapid obsolescence of the sites’ layout: Internet banking sites change very fast. Even the largest banks, periodically upgrade their online programs, adding new features in unfamiliar places. In some cases, clients can be perplexed by such changes.
Lack of “human touch”: There are many devotees to “community banking” to say that such ways to interact with a bank are not successful because people are dependent to “face-to-face banking services”. In their opinion, the lack of human contact is frustrating to customers.
Pros and Cons of branch banking
Security – The branch banking is less risky than Internet banking and has greater capacity to handle risks. The losses incurred by some branches may be offset by the profits earned by other branches.
Diversification – A branch banking organization can easily diversify its sources and uses of funds among various users. It can direct funds into a market requiring financing. Deposits are received from the areas where lots of savings and loans are extended in those areas where funds are scarce and interest rates are high.
Large-scale operations – Under branch banking system, a bank with a considerable number of branches usually processes huge financial resources and enjoys the benefits of large-scale operations. Over the Internet, clients tend to operate only with smaller amounts of money.
Low degree of customers’ specialization – Traditional banking implies less-skilled and less affluent clients than Internet banking. It is a fact that in order to be able to use Internet banking applications clients need the right technical facilities and minimal Internet and computer knowledge.
Legislative stability – State laws governing the organizational structure of branch banking are stable and clear compared with the legislative framework that governs the virtual environment. In terms of the internet’s legislative framework things can be radically different from one country to another.
Specialized consultancy – Community banking implies the presence of highly trained and experienced staff in the branches. This personnel is appointed to certain categories of clients and contributes directly to an increased efficiency of the bank – client relationship.
Cash transactions are possible – Even perpetual declines in the demand for cash transactions are a reality, such phenomenon pose no real threat to the traditional methods that involve paper money. Those kinds of transactions (cash based) continue to be an important part of each and every economy.
Higher rates of deposit attraction: Based on the lack of liquidity that occurs at the international level, one of the highest priority items right now for bankers is the deposit attraction. It is much efficient to attract deposits through physical branches than it is by using remote deposit capture (RDC  ) systems.
Tradition: The classical branch banking is hard to compare with the Internet banking in the field of establishing close personal relationship with the customers, owing to considerations such as: the short term experience and tradition that Internet banking has; the differences in the cultural backgrounds of the clients etc.
Costs – bank branches are not cheap to set up. Depending on the bank’s development goals and the jurisdiction the bank chooses, new branches may need to be started. Setting up a new branch may mean steep legal fees, corporate or account registration fees and in some cases banks are even required to own property (immobile) in the country in which they intend to operate.
Insufficient parking spaces – extensive urbanization is largely responsible for one of the most common today’s problem: insufficient parking spaces in downtown and suburban areas of cities. If we add traffic congestions to it, we might find a good reason for customers to renounce visiting a bank’s branch.
Personnel risks: The vast majority of staff in any bank is trustworthy and honest. However, banks are now beginning to realize and understand the scale of the threat posed by the small proportion of staff who act dishonestly and defraud their employer . Following recent complaints, Brasov Police (Romania) applied to Credit Europe Bank a penalty of 50,000 lei and ordered to repay the stolen money to the injured clients within 15 days. It has been determined that the local director of operations, three operators and a cashier made fraudulent banking transactions on behalf of the bank’s clients, diverting more than 2 mil Euros in the past 7 years.
Insufficient specialized personnel: Sometimes, the expansion of banks in certain new locations exceeds the possibilities that the local labor markets have in terms of specialized staff. Under such circumstances banks have to headhunt local specialists, relocate internal employees or train new ones. All those solutions involve considerable costs.
The choice of whether or not to renounce to the “click and mortar” model of banking in favor of banking online, depends on many variables. Although the benefits of online banking are undeniable, there are some inconveniences and concerns of which bankers should be aware before making such an important strategic move.
A comparative study conducted by the Research Institute of Applied Economics in 2008, over four important European countries (Finland, Spain, Italy and the UK) shows that the performance of different online banking models over the period 1995-2004 are not worse in terms of average returns to assets (or equity) than the ones obtained by the branch banking models. The study also reveals the fact that Internet banks are hard to distinguish from banks that adopt both click and mortar strategies. Country specific features appear to be more important in explaining differences across banks. That is why the researchers explain the performance of banks by a group of selected bank-specific features, but also add country-specific macroeconomic indicators and information technology related ratios.
The strategic initiative of banking groups to incorporate internet banks seems to reflect some competitive edge that these banks have in their business models. The management of these banks is generally more capable of handling personnel and other costs. Personnel expenses are comparatively low, but the costs for IT are disproportionately high.
Others studies show that multi-channel banks draw highest traffic rates on their Internet banking platforms than the pure Internet banks, due to their off-line channels, brand awareness and existing customer base. Under the same current of opinion there is a thesis according to which clients interested in value added products still prefer interaction with a physical branch. It is a fact that Internet banks need to reach a minimum dimension in order to become profitable. That is why good client adoption rate is a must for the Internet banks. Unfortunately this rate does not depend solely on the skills of the initiators but also on some external factors to the banking industry (egg: the percentage of households with access to internet at home, mass access to the specific technology, a higher broadband penetration rate etc).
In terms of client adoption rates, trust is also very important. Even if the clients can see the benefits of Internet banking, they may be unwilling to subscribe if they do not trust or have much experience with the Internet. On the other hand, people may only sign up for limited services like account viewing. This will save them from safety concerns but will still give them daily access to account activity.Under the circumstances, we should expect that the impact of Internet banks may not be strong enough to affect the branch banking system as a whole. However, Internet banks certainly contribute to increase transparency on specific products, like current accounts, allowing for comparisons among banks that were previously more difficult. 
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