The 2003 KDI-KAEA Conference on “Aging Population, Emerging China, and Sustainable Growth in Korea”

The Impact of Internet Banking on the Performance of the Korean Banking Industry: An Empirical Analysis

Kim, Hyeon Wook / Chang-Gyun Park(Author)

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This paper aims to verify the hypothesis that Internet banking, rapidly expanding in the
Korean banking industry, allows banks to reduce cost and ultimately contributes to higher
profitability. Our analysis, based on the quarterly financial statements of 20 Korean banks from
2000 to 2002, suggests that Internet banking, especially when it expands, contributes to
reduction of banks’ cost, while it does not affect their profitability. It implies that the primary
objective of introducing Internet banking, which was to reduce the operating cost such as
branch maintenance expenses, has been accomplished, but this cost-reduction effect has not
reached the stage in which beneficial effects of Internet banking overcome the negative effect of
initial investment on the profitability of banks. Considering that the growth potential of
Internet banking consists in its cost efficiency, this also indicates that Korean banks’ strategies
of expanding Internet banking would ultimately bring positive outcomes.
The findings of this paper offer an important implication that Internet banking has
increased social welfare by making banks distribute the benefit of cost reduction to customers
in various forms such as preferential interest rates and fee exemption, rather than internalize
the benefits to the banks’ profits. This paper also finds an indirect evidence that benefits to the
Internet banking customers has been primarily provided through the interest rate channel
rather than non-interest service channel. In addition, we found that the people’s preference for
face-to-face transaction may be very low in Korea, which supports the hypothesis that the cost
for securing customer base will be much reduced. From the results of empirical analyses, it can
be also anticipated that the profit-enhancing effect of Internet banking will become more
significant in the near future since the cost-reduction effect of Internet banking will be stronger
with the technology development that reduces the cost of maintaining Internet banking system.

Issue Date
Korea Development Institute
CHAPTER 6-3 The Impact of Internet Banking on the Performance of the Korean Banking Industry: An Empirical Analysis
 I. Introduction
 II. Internet Banking in Korea and Related Literature
 III. Empirical Analysis on the Impact of Internet Banking
 IV. Conclusion
 Appendix. Summary Statistics for the Variables in the Analysis
 Comments on “Impact of Internet Banking on the Performance of the Korean Banking Industry”
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