This study introduces a general intuitive framework for analyzing start-up firms with
innovative business plans, and uses it to investigate the performance of Internet-only banks and thrifts in
the U.S. Internet-only banks historically have underperformed branching banks, leading some to
conclude that the business model is not viable. But the automated production and distribution methods
used by Internet-only banks are likely to exhibit substantial scale economies, and most Internet-only
banks are still small. The empirical analysis confirms this proposition, and demonstrates that profitability
gaps shrink as Internet-only banks get larger. In general, the results suggest that the Internet-only banking
model may well be viable when executed efficiently.