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How is the banking industry responding to the rapid development of on-line commerce? Evidence suggests that many banks are beginning to deliver credit and deposit products electronically. In addition, some large banks are developing products designed exclusively for e-commerce. As banks venture into the electronic arena, however, they are finding that new opportunities bring new operational and strategic risks.
Many companies are embracing "e-commerce," or business conducted on-line over computer networks, as a means of expanding markets, improving customer service, reducing costs, and enhancing productivity.1 Companies have traditionally used computers to manage their product and customer data. Now, however, advances in networking technology have enabled firms to streamline their transactions with suppliers, distributors, and retailers through the electronic exchange of information.
Like other companies, banks are taking steps to expand the use of networking technology in their business operations. For these institutions, however, the advent of electronic commerce poses questions as well as opportunities. Will the role of banks in e-commerce basically mirror their role in traditional commerce? Or will banks offer new products that will change the nature of the banking business as e-commerce expands? What risks might accompany such a shift in banks' traditional business?
In this edition of Current Issues, we explore the possible implications of e-commerce for banks' business activities. We find that banks are beginning to use the Internet to deliver traditional banking products in more efficient ways. In addition, we report that some banks have taken the further step of developing new products designed specifically to facilitate e-commerce participation by their customers.
Our analysis of banks' entry into e-commerce includes a look at the strategic and operational risks banks may face in this arena. E-commerce will create new forms of competition and compel banks to make choices about the services they offer, the size of their branch networks, and the extent of their support for interbank payment networks. Participation in e-commerce will also increase banks' exposure to technological problems. Banks' success in coping with such challenges will help determine the scale of their influence in the electronic marketplace.
Advantages of E-Commerce for Banks
Banks have an important reason to pursue the conduct of business on-line.2 If they fail to respond to the opportunities posed by the Internet, they...