The Internet: Unlocking Value in Your Bank

Internet strategies are no longer an option for financial institutions. Online customer access to a range of products and services is as much a competitive imperative today as ATM and branch access. Appropriately implemented, Internet strategies can help banks amass valuable intelligence about customers and markets, and respond with targeted offerings.”Banks today need to have an Internet strategy,” says Ray Graber, a senior consultant at TowerGroup, a Needham, Massachusetts-based research and consulting firm. “I don`t think it`s going to be a successful strategy for any bank to ignore the Internet.” A recent consumer poll taken by TowerGroup shows why: Nearly 60% of U.S.

households today have access to the Internet and online services. Included in that group are some of banking`s most attractive prospects. Overall, households that are linked to the Internet earn more, are worth more, and are more likely to be looking for loans or investments within the next 12 months than are offline households, TowerGroup found. Meanwhile, the latest data from Gomez Inc., a Waltham, Massachusetts company specializing in Internet metrics, suggests that the more customers use the Internet to access banks, the more content they are with those banks. On a scale of one to seven, with seven being most satisfied, online banking customers report an average satisfaction level of 5.1, according to Gomez. Almost a third (31%) of online banking customers with low satisfaction ratings have considered switching banks because of bad Web banking experiences, Gomez says. None of this is to suggest bankers should start shuttering branch offices for lack of business. Better than half (51%) of all households polled by TowerGroup prefer to conduct routine banking transactions at brick-and-mortar branches, with most using two (26%), three (24%), or four (20%) different channels for financial services. “Irrespective of the fact that the majority of U.S. consumers are now ready for online banking in technological terms, behaviorally they continue to be slow to migrate away from traditional channels,” says Michael Weil, a TowerGroup managing director. “Rather than dropping existing channels, consumers use what they know while slowly adding new delivery channels into the mix.” “They end up interacting a lot more with their banks because they have more ways to do it,” Graber adds. That`s one reason why most Internet-only banks are now looking like failed dreams. The June announcement by Bank One Corp. that it was pulling the plug on WingspanBank.com was just the latest in a string of retreats from Internet-only strategies. Even E-Trade, a leader in the online financial services movement, has invested in brick-and-mortar, building a high-tech customer center in midtown Manhattan. Bank One was reported to have spent in excess of $100 million over two years trying to make Wingspan fly, but was only able to attract about 250,000 accounts to the Internet-only bank. The Chicago company`s self-named online banking service, bankone.com, has attracted over 700,000 customers, all of whom also have access to the bank`s ATMs, branches, call centers, etc. Plans are to convert Wingspan customers to bankone.com customers by the end of the year and deep-six the Wingspan brand name. Bank One, in a statement, said it had proven too expensive to support a unique Internet brand. Jennifer Schmidt, an analyst with Meridien Research, Newton, Massachusetts, isn`t surprised. “Many banks are finding these [separate Internet banks] failing, because there`s no brand recognition.” But like Graber, Schmidt says banks cannot afford to ignore the Internet. “An Internet strategy has become more of a business strategy. It`s something a bank needs to attract customers,” she says. “The banks that don`t have Internet strategies are really making a big mistake.” Banks do not need to budget huge sums for Internet initiatives, say industry experts. The best course of action for many financial institutions is to partner with a trusted third party that can support the bank in its overall Internet strategy. “It`s a no-brainer, unless you`re a big money-center bank,” says Dick Poje, president of R.J. Poje and Associates, Barrington Hills, Illinois. To run an Internet operation in-house, Poje figures a bank would have to spend more than $1 million to license the software, another million in implementation fees, plus ongoing salaries and benefits for hard-to-find programmers and systems experts. Tapping a third-party provider (sometimes known as an application services provider, or ASP) eliminates most of the upfront costs, explains Poje. Ongoing costs are typically reduced to a factor based on how often customers log into the service. Not only is it cheaper to outsource Internet support, outsourcing a bank`s Internet channel also supports quicker time to market for new products and services. Says Christine Barry, an analyst with Meridien: “You can start with basic Internet services and add on services as experience is gained.” Concludes Graber: “For smaller banks, it`s a lot easier. The larger banks are at the mercy of their IT departments.” Graber advises community bankers to look to the service providers that already support their ATMs, branch automation, and other technology initiatives and, if possible, combine all operations with one outsourcer. “That way everything emanates from the same system, and it`s all in real time.” The Internet has raised the bar of customer expectations, note Graber and others. Today`s financial services customers want real-time, online information about their finances, across all delivery channels. But the technology and work process silos that loom over the back shops of many money-center and regional banks make it impossible to integrate information and provide customers with up-to-the-minute snapshots of their accounts, no matter what channel they choose for accessing their banks. Not so for the bank that uses an ASP or outsourcing company to support technology initiatives. Outsourcers, especially giants like Fiserv, can leverage the economies of scale that arise from supporting thousands of banks` automation initiatives, explains Graber. Hiring a company like this to support branch, ATM, Internet, and telephone banking applications, means the bank doesn`t need to worry about channel integration; it`s all taken care of by the service provider. What the bank does need to understand, however, are the risks involved in turning over channel access to an outside company. “For any size bank, there is an exercise in risk management that you have to go through,” says Poje. “There have been lots of ASPs that have gone belly up in the last year. Not necessarily companies supporting online banking, but there`s no reason to think they can`t be vulnerable, too.” It`s a concern that has been voiced by regulators as well. The Office of the Comptroller of the Currency, for example, has issued at least four bulletins this year advising national banks of the risks associated with Internet banking and with outside providers of Internet-based information and services. Poje`s advice to banks that are in the vendor evaluation process: “Select an outsourcer, or an ASP, that you are confident is going to be there tomorrow.” With the technology processes in the hands of technology experts, bankers are free to focus their attentions on understanding customers.

The Internet is an ideal channel for collecting customer data. Graber, a former banker, says he`s witnessed 90% response rates to online customer surveys. “Banks need to build internal databases,” says Graber, and integrate those with Internet banking operations, so that they can respond quickly to changing customer circumstances. The ultimate strategic objective, suggest Graber and others, is to become a one-stop information shop for financial services. While customers may not wish to conduct all their financial activities at one bank, a small but growing army of customers is demanding one-site access to their banking portfolio. That`s where account aggregation comes in. Account aggregation is poised to become a “killer app” in Internet banking. With account aggregation, a bank compiles information on behalf of customers concerning all of their financial accounts and allows them to manage those accounts, no matter how many different categories or institutions are involved, from a single Web page. Fewer than one million Americans today subscribe to account aggregation services, but industry analysts are predicting a stampede of customers over the next four years. New York City-based Datamonitor, in what may be one of the most optimistic estimates, expects that nearly half of all online banking customers will be managing their financial affairs using account aggregation services by 2005.

While most consumers who are signed up today for account aggregation are using the services provided by nonbank entities (Yahoo! is a major provider), banks, as trusted providers of financial services, can be winners in the account aggregation marketplace. A recent survey by the Stamford, Connecticut-based Gartner Group found that 55% of online consumers want consolidated views of their finances, and more than half of those customers would prefer to access the information at a bank website. “Once customers get more accustomed to banking on the Internet, aggregation becomes the next frontier,” says Graber. It`s all about creating long-term value from a bank`s Internet strategy, and using it as both a distribution and a marketing channel. The important thing is to be in the game now, to realize that long-term value for both customers and shareholders. |BD|