The impact of Internet Banking on performance and branches: crisis or change in practice?

Internet Banking has become an important alternative to traditional banks. It influences the relationship between banks and their customers and consequently affects the banks’ business mixes, funding resources, employees, and risk-return profiles. This paper studies how Internet Banking’s use influenced European banks’ profitability and if the henomenon of the branches’ strong contraction (started in 2009 and consolidated from 2011-2016) depended on using these technologies or the economic crisis of the period. The exclusion of the COVID-19 crisis derived from the voluntariness to analyze the branches’ reduction in your primitive form and not as a consequence of the event’s extreme. The sample data comprises 3679 European banks from 2011 to 2016. The methodology used is the Instrumental Variables. This approach can control internal validity threats, such as confounding variables, measurement error, spuriousness, simultaneity, and reverse causality. The results show that Internet Banking has positively influenced the Net Interest Income and negatively affected the distribution of the branches, justifying the strong reduction. Surprisingly, the insignificance of GDP rates on the branch network, while the strong European prudential regulation had a negative impact. The study of Internet Banking’s impact on the branches is a new aspect and important for further developments. As transactions are handled online, branch offices will become more like service lounges rather than rows of tellers handling daily transactions.