Technological innovations have also intensified competition among banks

Technological innovations have also intensified

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Technological innovations have also intensified competition among banks. Innovations such as online banking, for example, have raised transparency and have made it easier for customers to compare different banks’ products. It is also easier for new institutions to enter the market, since new entrants do not need to have a branch network to distribute their products if they use the internet as their distribution channel. This has significantly reduced costs and allowed some banks to offer more attractive interest rates to their customers and to gain market share at the expense of banks with a larger branch network and higher operating costs. Market entry has also been facilitated by the technology of information exchanges, such as credit bureaus [Berger (2003)]. These exchanges collect data from financial institutions, trade creditors, public records and other sources; aggregate and summarize them; and then provide credit reports or credit scores to lending institutions, thus allowing banks to lend to customers with whom they do not have a close relationship. This has substantially lowered the cost of making a loan, since it is no longer necessary for banks to build a close relationship with their customers in order to collect information on their creditworthiness. However, loans that are granted based on hard information, such as credit scores also need to be more standardized, which reduces banks’ scope for differentiating their products and charging higher prices. This suggests that technological innovations have not only made lending more
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4 Business models in banking – how did they evolve and how do they need to be changed in the post-crisis period? The Journal of Financial Perspectives competitive, but have also changed the nature of lending, with transactional lending becoming more important relative to relationship lending. This shift may be best illustrated by the evolution of consumer credit, as, for example, is described in White (2007). Combined with greater price sensitivity and reduced customer loyalty, this has reduced the comparative advantage of those banks that focus on relationship banking, because they face higher costs due to their branch network and the large number of employees necessary for their business model. Financial integration is another important driver of competition in the banking sector. Deregulation and liberalization have caused the banking and financial markets to become more integrated over the past few decades. 4 In Europe, an important step toward an integrated market for financial products was the implementation of the Second Banking Directive in 1989, which introduced a “single passport” for E.U. banks. This passport grants banks located within the E.U. the right to offer services, either through the cross-border provision of services or through the establishment of branches, in any other member state without seeking authorization from the host countries. Another important step toward an integrated market was the introduction
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