Internet-only banks pose a serious, long-term threat to traditional banks and building societies, according to research conducted by University of Newcastle.
Feng Li, professor of e-business at the University of Newcastle, says that Internet banking is causing the biggest shake up in the UK financial services industry since the 17th Century.
Li, who will present his research findings at the British Academy of Management Conference in London today, surveyed 26 UK banks and building societies offering services via the Internet.
"Until recently the monopolisation of distribution channels has provided the basis for banks to build strong relationships with their customers," he says. "My research has revealed that these new players are posing a serious threat to existing banks by changing the rules of the competition and raising the general expectation of customers for services from all financial companies."
He argues that the recent dot com crash has not changed the fundamentals of Internet banking and that the established banks and building societies must radically overhaul their strategies and business models if they are to fend off competition from the new breed of e-banks.
The UK's financial services industry has the highest level of new entrants in Europe, says Li. Around 35 per cent of the companies who offer Internet banking services have recently entered the market.
Although many banks have started to offer Internet banking in varying levels of sophistication, they are most at risk from the Internet-only banks which do not have the burden of traditional overheads associated with banking, such as maintenance of high street branches.
Li also points to the challenges posed by supermarket banks, such as Sainsbury's Bank, and cherry pickers from other industries which expand into banking through the Internet with cheaper products in a limited product range. These players range from car manufacturers to utility companies, airliners and retail chains.
Li says: "The low price proposition of new entrants has led customers of established banks to demand similar benefits, putting enormous pressure on existing banks to reduce prices and provide more innovative products and greater choice."