CAN E-BANKING SERVICES BE PROFITABLE?

Olga Luštšik[1]

Abstract

For the last few years European banks have spent billions of euros into new electronic channels. But after some years of excitement banks long-waited sky-rocketing profits from this area didn’t occur. Estonian banks have also invested in expanding and improving the IT systems and a number of new e-banking services have been developed. Until recent time, most of the pricing decisions for e-bank services were made based on a gut feeling as current financial management information systems didn’t support such analysis. In the article author explores the implementation techniques of Activity Based Costing (ABC) in banking sector on example of an Estonian bank in order to analyze the cost structure for traditional and electronic channel transactions. The article shows how it is possible to implement ABC in banking sector and proofs empirically that electronic channels provide cost saving for banks and for bank clients.

JEL classification numbers: G21, L11, L86, M40, O31

Keywords: e-banking, profitability, activity based costing

1. INTRODUCTION

A few years ago no self-respecting financial consultant would travel without it: the bar chart showing that the marginal cost of Internet banking transactions was a tiny fraction of the cost of branch banking. It was the chart that launched dozens of stand-alone Internet banks. As a result, European banks have poured billions of euros into building direct channels like the Web, upgrading branches and call centers, and trying to integrate all these channels. Major financial futurists predicted to electronic banking a bright outlook. But after some years of excitement banks long-waited sky-rocketing profits from this area didn’t occur. Internet banks around the world are faltering. This situation requires a deep analysis for