However, coping with these disturbances have not prepared banks for adisturbance that requires them to urgently and radically restructure theirbusiness model - the Internet.

In this first part of a fortnightly series, we will present some of the waysthe Internet is changing every rule of the game in banking.

This changes everything
Consider the case of WingspanBank.com. It has no branches and has restrictedits presence to the Net. The value proposition to its customers is theconvenience of anytime, anywhere banking in its purest form. By doing awaywith a bricks-and-mortar cost structure it can also provide customers withthe benefits of a 100 bps more on deposits.

The icing on the cake is the cover of US Federal Deposit Insurance. Studiesshow that cost savings of almost 150 bps per transaction accrue to Internetbanks. These savings are available to them to share with either theirdeposit holders or their loan accounts. Or consider E-loan, an on-lineaggregator of mortgages. Its site allows potential borrowers to search andcompare the offerings of thousands of providers. Obviously, this issomething that a borrower cannot efficiently accomplish by walking around ormaking calls.

Eliminating the agent's commission effects further reductions in mortgagecost. As if this was not enough, E-loan monitors the mortgage over its lifeand continually alerts the borrower to cheaper refinance options. Thisexample could easily be transposed to auto loans, which is a popular productin the Indian context. Payments are yet another area. Historically, this wasthe exclusive preserve of banks because of their monopolistic control overclearing systems. The concomitant issuance charges and float associated withtraditional payment products has always been a cash cow for most banks. NewInternet-based products such as electronic bill presentment and payment(EBPP), e-check and e-cash will change this. For example, EBPP affordsconsumers and businesses the ability to receive and pay their billson-line.

This make possible not only lower costs and faster turnarounds but alsomakes available detailed information on the payments.

The challenge
It is obvious that there are good times ahead for Net-savvy customers. Butwhether banks can look forward to the "e-age" is not so clear. It is anopportunity for those who can harness the power of this technology to reducecosts and offset the squeeze of spreads by greater volume and new services.

Those banks who choose to ignore it, and stay embedded within their oldbusiness models, do so at their own peril. Bower and Christensen, who coinedthe term "disruptive" technology, cautioned managers to watch out forignoring new technologies which don't initially meet the needs of theirmainstream customers. It seems that till now, the legacy banks have not paidmuch attention. We replicated for India a survey that management consultantsBooz Allen & Hamilton conducted on Corporate Internet Banking.

Our findings are a cause for concern. Of the 48 Internet sites of banksoperating in India, more than half are mere glorified brochures with nointeractive capabilities. Another 16 provide customers with the addedability to download application forms or log queries. Just four sites comeclose to providing full Internet bank functionality and security includinginter-account transfers. Significantly, three of these sites belong to thenew private sector banks.

Next fortnight we will explore the structural reason why the Internet willmore profoundly transform banking than other sectors and try to envision thecompetitive landscape the banking sector is likely to have in the e-age.

Sanjiv Singhal works for a foreign bank. The views expressed here are hisown