Retail bank services strategy: A model of traditional, electronic, and mixed distribution choices

Design of a retail banking distribution strategy is an important issue in t hat industry. This paper shows the effect of new electronic distribution te chnologies such as PC banking on the choice of a bank's distribution strate gy. We present a competitive model of distribution strategy choice, includi ng heterogeneous consumers and banks, that allows a rich variety of custome r preference and technology cost parameters. Sensitivity analysis shows how several parameters affect the competitive outcome. This analysis suggests that changing consumer behavior and attitudes, instead of banks' cost struc ture with new technologies significantly affects the bank's distribution st rategy choice. If the segment of consumers that prefers PC banking remains small relative to the segment that prefers branches, then there will still be a market for specialized branch banks. Branch banking without PC banking services will be a viable strategy until the segment that prefers PC banki ng grows larger (amounting to about 40 percent of all transactions). Banks offering both branch and PC banking services can prevent successful and pro fitable entry by virtual banks (Internet banks offering only PC banking ser vices) as long as the segment of customers that prefer PC banking remains r elatively small (less than two-thirds of all transactions). Beyond this fra ction, virtual banks will be profitable. This analysis suggests that it may be a long time (if ever) before virtual banks turn a profit.