The Internet and the Deconstruction of the Integrated Banking Model
| Date | 01 December 2001 |
| Author | Feng Li |
| Published date | 01 December 2001 |
| DOI | http://doi.org/10.1111/1467-8551.00212 |
Introduction
Despite the massive changes in the banking
industry since the financial deregulation of the
1980s (Holmsen et al., 1998), the basic strategy
and business model of most banks, based on pro-
cess integration, monopolization of distribution
channels and service bundling, remain largely
intact (KPMG, 2000; Totonis and Foster, 1996).
Until recently, the success of most banks has
been based on a strategy of process integration,
service bundling, scale economy and the monop-
olization of an extensive physical branch network
(Nehmzow, 1997). However, new developments
in the Internet and related technologies are
questioning the basic assumptions of this inte-
grated business model. Historically, the distribution
channels have been the cornerstones of most
banks’ success, but the delivery capabilities of new
electronic channels are outstripping the traditional
branch-centred models that most banks use to
manage them (Holmsen et al., 1998). In the last
few years, the problem has been significantly
exacerbated by the increasing deployment of the
Internet. In particular, a cohort of value-focused
new entrants in the financial market are experi-
menting with very different strategies and busi-
ness models in order to capture the most lucrative
businesses and the most profitable customers,
by leveraging their unique resources and core
British Journal of Management, Vol. 12, 307–322 (2001)
© 2001 British Academy of Management
The Internet and the Deconstruction
of the Integrated Banking Model
Feng Li
Department of Management Science, Strathclyde Business School, University of Strathclyde,
40 George Street, Glasgow G1 1QE, UK
email: Feng@mansci.strath.ac.uk
The rapid development of information and communication technologies (ICTs), with
the Internet being one of the most significant, is shaking the foundation of the banking
industry. Simply deploying the Internet as a more efficient distribution channel will
not bring sustainable strategic advantages. To compete effectively, banks may need to
embrace a new set of strategic priorities, based on the ‘unbundling’ of banking services
and processes, and the ‘deconstruction’ of the integrated banking model. Such a radical
transformation threatens the profitability and survival of some existing incumbent
banks, and at the same time, it brings a cohort of new opportunities and powerful new
players to the market. This paper reviews existing studies on the use of the Internet in
banking, and highlights two prevailing models and the strategic thinking behind them.
Based upon recent empirical evidence gathered from in-depth case studies and other
information sources in the UK, the paper discusses a number of emerging tendencies
and explores possibilities to reconcile the discrepancies between the two prevailing
models. The paper calls for a radical departure from existing strategies in the banking
industry based on the concept of process integration and service bundling. A new
framework is outlined for banks and other financial organizations in developing and
evaluating their strategies. The latest evidence suggests that at least eight models of
Internet banking, somewhere on the spectrum between the two prevailing models high-
lighted by previous studies, have emerged in the UK. These models are illustrated
briefly in the paper. This is still a rapidly evolving area, and new research is clearly needed
to understand the key dynamics of the banking industry in the networked economy.
Finally, some themes for further research are highlighted.
competence, and by exploiting the new capabil-
ities of the Internet. New electronic channels also
make customers more knowledgeable about the
banking process, which is leading to a rapid shift
of bargaining power from banks to customers
(Amit and Zott, 2000; Bowers and Singer, 1996;
Evans and Wurster, 1997).
These changes suggest that the adoption of the
Internet in banking may turn out to be much
more than a new distribution channel to bypass
the expensive branch network. Further advances
in the Internet and related technologies may tear
apart the banking industry as we know it and
create a totally new financial system (Nehmzow,
1997), through the unbundling of banking services
and the deconstruction of the integrated banking
model. The incumbent banks should at least be
prepared for such an imminent strategic trans-
formation and radical shake-up of the banking
industry.
The primary concern of this paper is not to
predict how the banking industry will evolve in
the future, which may turn out to be a fruitless
exercise anyway because of the enormous un-
certainties involved. Instead, the main objective is
to explore emerging tendencies and identify key
factors that will be critical for banks to compete
effectively in the future in the personal banking
area. As such, this paper is primarily exploratory.
A review of existing studies on the use of the
Internet in banking has identified two prevailing
models based on two distinctive strategies, which
will be discussed in the next section. In particular,
one of the two models has highlighted the possible
‘deconstruction’ of integrated banking processes,
which calls for a radical strategic change in the
banking industry. These models are then exam-
ined in the context of some recent empirical work
in the UK. A series of emerging tendencies from
the empirical work will be discussed in detail, and
some new models that have become apparent in
the last year or so will be illustrated. Following
that, the paper will discuss why it is inadequate
for banks simply to apply their existing strategy
and business model in the information age;
and why some banks should extend the use of
the Internet from a new distribution channel to
more strategically focused applications. A new
framework will be outlined to reconcile the appar-
ent discrepancies between the two prevailing
models. Finally, some themes for further research
will be highlighted.
The Internet and the banking industry:
the two prevailing models
Traditionally, the monopolization of a set of
integrated distribution channels has provided
the basis for banks to build strong relationships
with their customers (Evans and Wurster, 1997).
Those leading, to shape the way in which products
are distributed, can often gain long lasting com-
petitive advantages. Like ATMs and ’phone bank-
ing, the Internet is seen by many banks today as a
new, cheap distribution channel (Bucklin et al.,
1996; Flur, Mendonca and Nakache, 1997; Mols,
1999). Unlike traditional corporate networks (which
are essentially private computer networks), the
Internet has become a mass infrastructure avail-
able to an ever-growing segment of the population.
It is based on an open, standard protocol for
communications (Totonis and Foster, 1996), and it
is relatively inexpensive and non-proprietary.
Most of all, the Internet is not only cheaper than
other distribution channels but also allows banks
to reach new customers in new areas more easily
(Mols, 1999). In doing so, the integrated banking
model can be further enhanced and the under-
pinning strategies can be retained.
However, a new business model is emerging
around the concepts of ‘deconstruction’, ‘frag-
mentation’, or ‘unbundling’ of the integrated
banking model, and even the ‘dis-intermediation’
(i.e. bypassing) of traditional banks in the pay-
ment and banking system (Baum, 1998; Lundquist,
1997). Rather than using the Internet to further
enhance and extend the integrated banking model,
some new entrants in the market are leveraging
the potential of the Internet and related tech-
nologies to focus on particular aspects or sections
of the banking process where they have distinctive
advantages. This could be either one particular
segment of the market (e.g. a specific group/type
of customers), or one stage of the banking process
(e.g. product design, or distribution, or customer-
relations management). In doing so, the process
traditionally managed within one bank is increas-
ingly broken up into multiple businesses with
each company focusing on one section or one
aspect of the value chain. Such a scenario calls
for a radical shift in the strategies of existing banks
and it may eventually lead to the ‘deconstruction’
of the integrated banking model and a radical
shake up of the banking industry (Barnes and
Hunt, 2001; Hagel and Singer, 1999).
308 F. L i
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