This fortnight we first explore why the this new technology, described asthe most transforming invention in human history, is likely to have a higherimpact on banking and then examine some of the characteristics the newelectronic marketplace will have.

No physical exchange
In the case of buying physical goods on-line, a large chunk of the value tothe customer is derived once the goods are physically delivered. TheInternet brings supplemental value by aiding the search process, makingcomparisons efficient and automating order placement and billing. Indetermining which bank to place a deposit with, on the other hand, thesearch and comparison can be done on-line as can the actual deposit booking.

Since there is never a physical exchange, the Internet is creating theprimary value for a customer. Additionally, it is doing so in a far moreefficient manner than all alternative methods. The Perfectly CompetitiveElectronic Marketplace The Internet will create an electronic marketplacefor banking products. As compared to the current oligopolistic structure,this marketplace is going to be more efficient for both borrowers andlenders and will likely tend towards perfect competition. The primary driverof this marketplace's move towards a competitive structure, entailing nosupernormal profits, would be the on-line auction mechanism that has gainedpopularity in selling everything from used cars to a perfume bottlecollection. This mechanism makes pricing transparent and also makes itdynamic since it is now driven by market conditions. Already, investmentbanks such as Hambrecht & Co have started to determine prices for IPOs byon-line auction. The issuer is able to secure higher prices and pay almost200 bps less in fees. It might not be too long before we find that largeIndian corporates will put out borrowing plans for banks to bid on-line in aDutch auction with the lowest quote getting the deal.

Perfect product information will become available to the prospective buyervia the sites that aggregate a product from different providers. A goodexample of this would be bankcd.com that aggregates information on UScertificates of deposit by annual percentage yield and tenor. The sitecharges a small fees for the service but if you alert them to a rated bankpaying a higher yield, the fee is waived. If the regulatory frameworkpermits cross-border transactions, the number of sellers would increasesince the marketplace would cease to be limited by local or regional limitsand extend to the international arena. Perfect information would beavailable to the providers as well. In the new e-age it less likely thatanyone could hide a bad card payment history from prospective providers andbeat the system by switching providers frequently. To that extent thissuperior information set would enable banks to move from portfolio pricing,where good credits subsidise the bad ones, to different prices for differentcustomers.

Customer supremacy
For customers, this all translates into much lower transaction costs andnarrower borrowing-lending spreads. Anytime, anywhere banking will becomepossible. Response times will greatly improve and on-demand delivery willbecome reality. For example, NextCard in the US promises instant approvaland a choice of payment terms based on the applicant's credit history, allon-line and in less than 60 seconds! Customers will be display loyalty toonly competitive prices. Relationships will wither as switching costs getreduced to the click of a mouse. The customer will be truly supreme.

Having detailed the impact of the Internet on the banking sector and giventhe likely competitive dynamics, next fortnight we will explore thestrategic options available to banks.

Sanjiv Singal works for a foreign bank. The views expressed here arehis own