As electronic networks become more robust and widespread, they are beginning to attract the attention of retail banks. Like ATMs and phone banking before them, however, they tend to be seen as merely one more cheap distribution channel. Accordingly, banks are replicating the branch banking experience on line—even to the extent of creating 3D virtual branches for their customers to navigate through. Such an approach is characteristic of early attempts to use any new technology platform. Consider the first television programs: people stood around microphones in what were essentially radio broadcasts with visuals awkwardly added on.

Efforts like these miss the opportunity afforded by the new medium to rethink the entire value proposition of a retail bank. Some non-bank entrants into the online world are experimenting with an altogether different business model. They are exploiting the unique capabilities of electronic networks and leveraging their own resources through web-based strategies. These strategies unbundle the financial services business and mobilize a broad array of specialized providers to deliver increased consumer value through more innovative products, wider choice, reduced complexity, and lower prices.

These new entrants could pose a threat to retail banks, targeting their most profitable product lines and customer segments....