JOURNAL ARTICLE:
TRANFORMING CONSUMER BANKING THROUGH INTERNET TECHNOLOGY:
A Guide to develop successful online banking solutions through the use of Internet technologies
INTRODUCTION:
Internet Banking Comes of Age for more than 15 years, industry experts have predicted that home electronic banking would finally reach a critical mass of consumer acceptance and that it would soon be commonplace to pay bills and access financial accounts from home.
Today, online banking is finally a reality, both in rapidly growing consumer acceptance and in the financial results being seen by institutions that are deploying state-of-the-art electronic banking.
First:
The huge investments required in proprietary IT have disappeared almost entirely. With the rise of the Internet and standard TCP/IP networking, banks can now offer online banking without dial-in lines, modems and all of the necessary equipment and people needed to support them. All that's needed now, from an IT standpoint, is a standard connection to the Internet, at a cost that can be as low as $1,000 per month.
Second: The development of universal standard protocols such as OFX and Integrion Gold make it easier for financial institutions to support online banking without any investment in client software development.
Today, developing an online banking solution using OFX, for example, allows a bank to please both types of consumers while removing all of the costs associated with the development, distribution and support of client software.
This white paper explores the growth in online banking and the ways in which financial institutions can take advantage of Internet technology to offer cost-effective banking solutions. It outlines how the Internet is affecting banks, thrifts and financial services companies todayand what some of the opportunities will be in the future. Next, it introduces a four-phase framework for understanding the different ways banks can get onlineand the advantages of each level of online commitment. Finally, it offers some suggestions for developing an Internet banking offering. The paper concludes with a few tips for implementing an effective online strategy.
The Growth of Internet Banking
Internet banking is growing faster today than most financial services institutions had ever expected. Today, roughly 4.5 million households use Internet banking and or bill payment at least once a month, and that number is expected to increase to 33.5 millionnearly 31% of all U.S. householdsby 2005.
Internet Banking as a Strategic Necessity
To understand this, consider the affect of ATMs on the banking industry. From 1977 to 1988, Citibank, an early adopter of ATM technology, increased its market share in New York City from 4% to 13.4%. Many analysts agree that ATMs were a substantial driver of that impressive growth. Indeed, in its early stages, the ATM was a source of strategic differentiation for Citibank and other early adopters. But, as the technology was deployed more widely, the source of value associated with having ATM technology shifted. Today, ATM technology doesn't differentiate a bankit's expected by consumers as a basic service offering. ATMs have migrated from a differentiator to a strategic necessity.
The Opportunity for Internet Banking
The Internet poses enormous opportunities for banks, thrifts and other financial services institutions to fundamentally reshape their organizations. The benefits of the Internet permeate an organizationfrom marketing and sales to back office and operational functions. Some of the most relevant benefits of Internet banking follow:
Increase Customer Satisfaction
Internet banking allows customers to access banking services 24 hours a day, 7 days a week. Like ATMs, Internet banking empowers customers to choose when and where they conduct their banking.
Expand Product Offerings
Internet banking allows financial services institutions to capture a larger percentage of their customers' asset base. Today, banks and thrifts compete with brokerage houses, insurance companies and mutual fund companies for a growing share of consumers' financial assets.
Increase Customer Retention
One of the primary reasons people change banking institutions is that they have relocated from one area to another and, as a matter of convenience, desire a bank that provides access and services in their new location. While many banks offer ATM, bank-by-mail and telephone banking services, customers often find that these services do not meet all of their needs. With the rise of Internet banking comes the ability to conduct most, if not all, of a typical customer's banking online, either via Web access or through personal finance software.
Extend Geographic Reach
Many banks that have significant online banking systems report that in addition to increased customer retention rates after physical relocations, they are seeing new customer growth outside their home regions. And this growth comes from new customers who have never lived in the bank's home region and will likely never visit a physical branch. Supplemented by national ATM networks, bank-by-mail services and telephone banking, some banks have begun marketing their services nationwide without having any physical locations outside their home territory.
Cross-Sell Services
Internet sites collect useful data in ways that are virtually impossible to collect through any other medium. Tracking software allows a bank to monitor which Web pages customers (and prospective customers) viewand how long they spend viewing them.
Identify Profitable Customers
As discussed earlier, the Internet allows companies to capture transaction and customer information more readily than any other financial services delivery channel. In addition to using this information to market special products and services, some organizations use customer data to determine whether or not a particular customer, or an entire customer segment, is profitable.
Reduce overall costs
Internet banking reduces a bank's costs in two fundamental ways: it minimizes the cost of processing transactions and reduces the number of branches required to service an equivalent number of customers. According to the American Banking Association, the average cost for a full-service branch transaction is roughly $1.07. Since an Internet banking transaction links directly to the back-end processing system, an Internet transaction costs roughly $0.01.
Identify New Fee Services
Some banks use Internet banking as an opportunity to generate additional revenue from customers. Typically, fees range from free to $14.95 per month, depending on the level of service, number of transactions and type of account. It is still unclear whether or not banks will continue to be able to generate fee revenue from online banking. It's likely that Internet banking pricing will mimic ATM pricing.
The Biggest Obstacle to Success
While there's little question that Internet banking offers substantive advantages to both consumers and financial institutions, the issue of security is often cited as a major barrier to widespread consumer adoption. While many of the actual security issues today have been addressed with recent technical advances, financial institutions may find that consumers still perceive a bigger problem than there really is.
The Four Phases of Internet Banking
A bank typically considers four phases in developing an Internet presence:
Phase One: Marketing and Promotion
Phase Two: "Light" Interactivity
Phase Three: Full Transactions and Services
Phase Four: Strategic Usage
While most banks migrate from phase to phase in the order given, some skip Phases One and Two altogether and move directly to Phase Three: Transactions and Services.
The following table highlights some of the key distinctions of the four phases.
Phase One:
Marketing and Promotion
Phase Two:
Light Interactivity P
hase Three:
Full Transactions and Services Phase Four:
Strategic Usage
Focus Marketing Web site Customer acquisition Banking functionality Strategic change
Primary Services Published information on bank services
Branch / ATM map
Customer service e-mail
Loan calculators
Credit card applications
Savings, checking account applications
Financial Planning articles, advice
Account look-up, balances, transfers
Bill payment
Car loans, credit cards, mortgages
Statement review
Cleared check presentment
Sophisticated cross-selling of new services
Customer profitability analysis
Bill presentment & payments
Primary Benefit Provide information to customers and prospective customers
Reducing paperwork
Low-cost ways to attract and impress customers
Retention of existing customers
Attracting high-value customers
Reduction in service costs
Increased service offerings
New revenue opportunities
Increased margins
The resources required to pursue these phases are highly dependent on a bank's back-end processing system and technology infrastructure. There is not necessarily a correlation between bank size and the phase in which the bank is currently operating.
Phase One: Marketing
Launching a Phase One presence involves very little risk. Generally, banks consider Phase One to be a learning experience. They use existing marketing and promotional material, adapt it for the Internet and develop a Web site. Phase One requires minimal investment, limited maintenance and limited resources. Often only one or two employees are involved in creating and maintaining the Web site, thereby reducing the burden on the organization. In fact, many banks outsource the creation and management of the Web site to a qualified specialist or service firm. Engaging in Phase One provides the opportunity to learn about the Internet and to signal to customers the importance of the Internet while promoting traditional services to a wide audience.
Phase Two: Light Interactivity
Phase Two involves light interactivity. In this phase, banks enhance their public Web sites in an effort to provide more value to existing and prospective customers. Examples of services or functions offered in this phase include online loan calculators to help customers determine their payment schedules, credit card and loan applications, and stock or mutual fund information. Banks have experimented with regular articles about financial planning, as well as explanations of financial terms and products. These services are designed to support existing customers and keep them coming back to the Web site on a regular basis.
In addition, well-designed free services on the Internet give banks an opportunity to promote their services to new customers who visit the Web site to make use of these free tools. What distinguishes Phase Two from Phase Three is that in this phase there's no link from a bank's back-end processing system to its Internet Web site. A Phase Two deployment requires a larger investment than a simple marketing site but does not require the larger systems integration investment of a full online banking system.
Phase Three: Transactions and Services
Phase Three offers true online banking over the Internet, including balance transfers, account statement access, bill payment services, account applications, check image retrieval and customer service mechanisms.
As outlined in this paper, the benefits to a Phase Three deployment can be considerable, and there are many motivations for pursuing this phase. Some banks migrate to Phase Three to retain key customers; others to acquire new ones. Some banks consider it a defensive movethey fear they will lose their best customers if they don't offer online banking. Others are looking to reduce overhead costs either in physical branch operations or customer support resources. Still others consider Phase Three an opportunity to generate fee income and to offer services they otherwise wouldn't be able to offer, such as credit cards, mortgages and mutual funds.
Phase Three deployments are considerably more complex than those of Phase One and Two, because of the systems integration requirements in connecting a public Web site to existing transaction systems. In addition, Phase One and Two deployments do not have the security concerns of Phase Three, since actual account and customer information is not available. Fortunately, due to standard protocols and security products now available, a Phase Three banking deployment costs a fraction of what it did even a few years ago, while offering all of the benefits described in earlier sections of this paper.
Phase Four: Strategic Change
In Phase Four, banks revolutionize transaction processing and customer interaction. They replace investments in "bricks and mortar" with investments in advanced Internet services and Web technology. They develop sophisticated customer databases to enable advanced customer segmentation to increase cross-sell opportunities and customer retention. They build efficient targeted marketing campaigns that boast success rates far greater than direct mail campaigns. Web-enabled decision support systems within the organization improve the creation of both targeted online and direct mail campaigns by giving bank marketing departments access to critical information and the ability to query and run simulations against these sophisticated customer databases. These advances allow banks to experiment with new ways of exceeding their customers' expectations.
|
