Banking, Online

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BANKING, ONLINE

When the clicks-and-bricks euphoria hit in the late 1990s, many banks began to view Web-based banking as a strategic imperative. The attraction of banks to online banking are fairly obvious: diminished transaction costs, easier integration of services, interactive marketing capabilities, and other benefits that boost customer lists and profit margins. Additionally, Web banking services allow institutions to bundle more services into single packages, thereby luring customers and minimizing overhead.

A mergers-and-acquisitions wave swept the financial industries in the mid-and late 1990s, greatly expanding banks' customer bases. Following this, banks looked to the Web as a way of maintaining their customers and building loyalty. A number of different factors are causing bankers to shift more of their business to the virtual realm. Among these are electronic billing; the validity of e-signatures, approved by Congress in 2000; account aggregation (whereby a customer's entire range of financial relationships are coalesced on a single Web site); and the move in the wake of the Financial Services Modernization Act to create one-stop shopping for financial services. A report by New York-based eMarketer Inc. estimated that about 86 percent of all banks, credit unions, and savings institutions would offer online transactional sites by 2003.

Online banking encompasses both the Web-based operations of established brick-and-mortar banks as well as Internet-only banks. The latter offer several perks, including higher interest rates on checking accounts, higher yields on certificates of deposit, and electronic billing free of charge. However, Web-only banks suffer from several drawbacks, such as the inability to provide local business loans and other regionally-based services, a lack of ATM machines, and sketchy viability in the minds of consumers.

THE EVOLUTION OF ONLINE BANKING

While prototypic PC banking systems were first developed in the 1980s, the online banking industry of the early 2000s originated with Microsoft Corp.'s home banking network, introduced in 1994. By 1997, some 4.2 million U.S. households did their banking on the Internet. For several years, online banking was synonymous with PC banking, but this reduction is no longer adequate because Internet-based financial transactions are increasingly used with cell phones and other wireless devices. Indeed, ever more gadgets are expected to be outfitted with Internet and smart-card capabilities, moving toward perpetual connectivity for consumers.

Wireless banking provides all the benefits of online banking without the PC. Wireless bankers can use cell phones and similar handheld devices to do their banking anywhere, at any time. In 2001, wireless banking was more common than PC banking in Europe and Asia. Some analysts expected the same to be true in the United States within a matter of years. Some argued that wireless technology could be the stimulus needed to take online banking from a niche activity to a mass-market staple.

Leading U.S. banks lag behind their European and Asian-Pacific counterparts in offering wireless services to their customers. According to Meridien Research, less than 30 percent of the top banks in the United States provided such service in 2001, compared with about 80 percent of Asian-pacific leaders and 70 percent of European banking majors.

LUKEWARM CUSTOMER RESPONSE

Framingham, Massachusetts-based International Data Corp. (IDC), a leading research firm, found that while nearly 50 percent of U.S. households were online in 2000, only 10 percent were active in any online banking. Estimates for the future showed only modest growth; by 2004, IDC expected about 22 percent of U.S. households to bank over the Internet.

Online banking is fraught with difficulties. Leading this list in the early 2000s was consumer confidence to protect financial information from potential hackers and cyber thieves. Mainspring Inc. of Cambridge, Massachusetts conducted a survey of 209 defectors from online banking and found that nearly one-third did so out of concern for security. Those fears were given weight when, in September 2000, Western Union Financial Services was the victim of a high profile hacking in which nearly 16,000 accounts were compromised. Online banking also was hampered by customer service problems. To their dismay, banks found that simply getting their systems online was only the tip of the iceberg; the process necessitates significant investments in new forms of customer service. For instance, online customers expect return emails rapidly, in a matter of hours. Thus, systems and personnel need to be in place to make such a quick turnaround on a customer's inquiry. Other key reasons for customer hesitance included basic connection problems with logging on to the banking network, and a lack of clear advantages in banking online versus through traditional channels.

Online churn, whereby customers allow their accounts to lapse, was another problem for online bankers who not only sought to maintain online customers, but to keep them active so their online efforts would pay off. Efforts toward increasing the user-friendliness of online banking, including more easily navigable Web sites, improved inquiry-response times, and other measures seemed to finally pay off in 2000 as churn rates fell to 9.8 percent in the second quarter, compared with 49.2 percent in the same period the year before, according to CyberDialogue, a New York-based research firm.

The eMarketer report, compiling and analyzing data from Forrester Research, Grant Thornton, Tower Group, and several other leading banking sources, found that despite the lackluster performance of Internet banking, most banks (especially those with assets exceeding $100 million) intended to create or augment their Web banking operations, often as a defensive posture. Thus, while frustration and complications abound, online banking was firmly established as part of the financial services paradigm in the early 2000s.