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Onward, Online Banking

05/30/01 02:17:39 PM PST
by David Penn

The threat of more and more bank mergers and the rise of click-and-mortar financial institutions have online banks focusing on what they do best: speedy, convenient savings, loan service, and some of the best yield rates available anywhere.

For many, one of two images represent the concept of online banking. The first, enjoyed by technophiles and promoted heavily by online banks, typically shows a professional working mom or an active retiree checking account balances with a wireless handheld device. The online-banking customer in these images is almost always on the go, underscoring the sheer convenience of online banking, and the transactions are always simple - a couple of quick taps on a touchpad and off our online banking customer goes to his or her next adventure.

"The main attribute [of online banking] is convenience," says Greg McBride, an analyst with "The ability to conduct financial transactions, regardless of location" was perhaps the first promise of online banking. "You didn't have to walk into a bank branch. You were able to do so from your laptop," he points out, "whether you were in a hotel room in a different part of the country or you were just sitting at your kitchen table in the evening." (McBride discussed banking and consumer finance trends in a recent interview, available at

The conveniences don't just extend to customers, either. David Becker, chief executive officer and chairman of the board of First Internet Bank of Indiana, commented on a study that suggested a transaction performed at a bank branch costs the bank an average of $1.07, adding that "automated teller machine [ATM] transactions cost less than half that, and automated telephone banking transactions are half the cost of ATM transactions." Where did Internet transactions costs weigh in?

An estimated $0.01.

Unfortunately, the other image of online banking that comes across in the media N whether it's a headline such as the recent "Million Dollar Net Bank Fraud" or simply another concern about the profitability of online banks - is an image of fear and trepidation. Combine this negative publicity with popular misgivings about Internet safety in general and the result is a reluctance on the part of many investors to embrace online banking.

But if those investors were to think about it, most of their banking is conducted electronically anyway: transactions, payments, accounting, reconciliation. In some ways, the arrival of online banking is only the final chapter of a relationship between banks and customers that has been converting to digital for years.


Internet-only banks conduct just a fraction of all online banking. Jim Bruene, publisher of Online Banking Report, which is one of the first monthly newsletters about online banking, interactive financial products, and financial markets, estimates that there are perhaps a dozen Net-only banks, representing less than 5% of all online banking transactions. All the same, he believes there will be increasingly less and less for brick-and-mortar banks to do as people get more comfortable with the idea of online banking and online banks get a better sense of what customers really want.

"There are still some things that you want the physical presence for. Safe deposit boxes, for example," Bruene goes on to say. "The problem is you're paying a huge amount of money in hidden costs in that branch. Over time, it just won't make that much sense to have that many branches around."

"Banking is electronic information," he points out. "It has been for decades." And it is for this reason he understands why banks have been quick to take to the Internet. "There's no physical inventory, there's no returns, there's no color catalogs, there's no trying things on. ... It's the perfect thing to be all-electronic, because it already is."

Bruene notes that the only resistance to online banking on the part of banks has to do with the costs involved in adding Internet access to their current systems. The size and cost of such an operation varies depending on the banking system being used at the time, as well as on whether the bank wants to operate the website, as opposed to outsourcing the operation, which a number of banks do. Says Bruene, "I talked with an Internet bank today who said it was a $20 million to $30 million investment in technology."

There are two different types of Internet bank. The most common is a spinoff or division of a traditional bank. Wingspan is one prominent example, having been a division of Banc One. However, a few startups have developed without the brand assistance of a larger, well-known financial institution; they exist online only, without a physical presence. These startups, often launched by software industry veterans who employ experienced bankers to help with operations, controls, and risk management, face significantly greater challenges than those affiliated - however loosely - with traditional banks. With First Internet Bank of Indiana, however, Ceo Becker combines his 20 years of experience in real-time transaction processing and entrepreneurship with president and chief operating officer David Lovejoy's experience in consumer, commercial, and investment banking.

"When it comes to the Internet, there's a big trust issue," says Bruene. "When it comes to people's money, there's a big trust issue. Combine those two and you have orders of magnitude of trust issues, and you do not trust someone that you haven't heard of with your money, much less someone who's just got a website. The power of the trusted brand in banking and financial services is huge."

McBride agrees: "When you look at the customer count of people who are banking online and the ratio of those who are doing so with their existing brick-and-mortar institution, it really speaks to the fact that people desire that convenience, but at the same time, they want that branch presence, they want that ability to deal with someone face to face should a problem arise."

Becker of First Internet Bank of Indiana takes some issue with the idea that "face to face" contact is necessary for a complete customer banking experience. Calling it "the most common misperception," Becker notes: "We have won over a lot of these skeptics by providing great, responsive service. Service issues are extremely rare. In any given month, we receive fewer e-mails and telephone calls combined [concerning complaints] than the total number of customers we have."

Because most people are far more accustomed to doing their banking in person with a real-live teller, this is a significant mental and emotional hurdle for online banking to overcome - whether rational or not.


The biggest area of danger for online banking customers, according to Bruene, is authentication - essentially, the process of making sure customers are who they say they are. But this problem, he notes, is ubiquitous to banking. "It's not really an Internet issue. [Criminals] could be sitting in a branch. Or they could be on the phone. Or they could be in the mail. Or they could be on the Internet. They will try to screw you any way they can."

The most recent "Net banking fraud" involved fake bank guarantees and a scam that netted as much as $3.9 billion, as reported by Reuters in April. The crime, which was first detected by the Commercial Crime Bureau of the United Kingdom, was apparently operated from inside the U.S., though the fraud was international in scope. Still, Bruene asserts there are far fewer losses in electronic online banking than in the paper world, noting that the loss between merchants and banks in the paper-check industry averages around $10 billion a year in the U.S. alone.

All the same, he acknowledges the fear many people have about using online banking, even if most people still have their paychecks directly deposited into their checking accounts. "It is a huge fear with people getting started," Bruene says. "And it's not completely irrational," even if electronic systems, on average, are going to be more secure than paper ones.

(For more information about security on the Internet, see "Online? On Guard!" elsewhere in this issue.)


Hearing Bruene enumerate the advantages of online banking might convert a few nonbelievers. Lending is one area where online banks can develop an edge over other banks. Bruene notes that for the past 40 years, consumers have been happily accepting loans through the mail - in the form of credit card offers. "It's not an issue of 'Well, I want to have my loan from this bank on the corner,' " he explains. "It's an issue of 'If you're willing to give me the credit right now, when I need it, at a reasonable price.' And the Internet is perfect for that."

Another area in which online banking succeeds is in what Bruene calls "information on demand." He uses the example of a financial dashboard or console, where customers can adjust security dials, activity dials, balance dials, to get exactly the kind of information they want from their bank as quickly as that information can be delivered.

"You go onto the website and say, 'Hey, send me an e-mail when my balance goes below $1,000. Send me an e-mail for security purposes if my credit card is used outside of the United States," Bruene says. "It's management by exception from then on out."

One thing that Internet banks have begun to do for themselves, however, is eliminate low-balance accounts because of the inefficiency of servicing such a small amount of capital. "Traditionally," notes McBride, "low balances at Internet banks have still commanded a very high yield." So restricting these accounts - by way of balance requirements or service fees below certain balance levels - is one way that Internet banks and Internet divisions of traditional banks are attempting to increase their profit margins.

"Actually, it's a game that the traditional brick-and-mortar banks have been up to for some time," says McBride, pointing out twice-yearly studies conducted by that indicate fees are consistently increasing among the larger financial institutions. Even so, McBride notes that the accounts offered by Internet banks, relatively speaking, are still "head and shoulders above" what is offered by most large banks from a fee and yield perspective.

And it is this perspective that McBride thinks is still the most promising one through which to view, in particular, the better Net-only banks. "Regarding the fees and yields - Internet banks, even now, are still offering accounts with a decided advantage [over traditional banks] in that area."


Has online banking lived up to its hype? McBride thinks that considering the total number of people who are banking online - and in particular the growth in the number of people banking online - it looks as if online banks have delivered on much of their initial promise.

What these extra online services amount to, says McBride, is another distribution channel: "A lot of it is aimed at keeping the customers they have. It's another manner in which their customers can interact with the institution."

In terms of choosing between click-and-mortar banks and Internet-only banks, McBride notes there are "extensive yet objective" listings at that include not only the rates, but also the fees that are offered by these institutions.

The future of online banking seems secure, if only because there is so much greater efficiency, convenience, and savings to be derived from it. But if online banking is to thrive, financial institutions will have to pay more attention to what customers want and less attention to the alleged value-added products that only serve to make banking more cumbersome to consumers

"What has been successful and what will be successful are things that make banking easier, less time consuming," Bruene says. "And that hasn't been the focus so far."

"Over half the country gets their paycheck direct-deposited," he observes by way of example. "Well, there's no reason why your bank couldn't send you an e-mail when it posts to your account on Friday afternoon that says: 'Hey, your check's arrived. Have a good weekend.' Or after three years of that e-mail, maybe they could turn around and say, 'We'll send you an e-mail if your check doesn't arrive.'"

Bruene comments: "Banking is a utilitarian function. No one really wants extras. The idea is to do less, and then go on to something that's fun."

Becker of the First Internet Bank of Indiana is well aware of the challenges that confront online banking, particularly Internet-only banks such as his. "For all the unnecessary expense, fancy branches that banks maintain do offer one significant advantage: They're a great marketing tool. If a person passes a bank every day on his way to work, he's probably going to think of that bank as an option when he evaluates his banking relationship."

But Becker is undaunted: "Throwing money after the problem isn't the answer. Serving our existing customers well has been the best means of attracting new customers."

David Penn can be reached at


Gopalakrishnan, Venkatesh [2001]. "Online? On Guard!" Working Money, Volume 2: July/August.
Penn, David [2001]. "Cassandra Toroian Of," interview, Working Money, Volume 2: March.
____ [2001]. "Greg McBride Of," interview, Working Money, Volume 2: May.

Copyright © 2001 Technical Analysis, Inc. All rights reserved.

David Penn

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