Citi's Web Banking Strategy Seems to Echo Internet-Onlys

Retailers are running short of Apple Computer Inc.'s popular iPod music players, but last week Citigroup Inc. started offering the popular holiday gadgets to customers for free.

However, people cannot get iPods at Citi branches; the bank is offering them only to new customers who open accounts and pay their bills online.

Citi, one of the world's biggest banking companies, has close to 1,000 branches around the country. However, the iPod promotion, aimed at encouraging people to bank through the Internet, demonstrates that in many ways Citi has adopted an online strategy similar to those of some of the most successful Internet-only banks. E-Trade Financial Corp., for example, offers customers $75 to open an account, and $25 more if they pay bills online.

Other banks with branches have offered incentives to customers to do their banking through the less costly Internet channel. Wachovia Corp. offers current customers who pay some bills online $10 to pay an additional monthly bill through the Web site.

Citi customers can choose to receive $200 in cash instead of the iPod if they open an account online and pay bills online for a year. (The bank delivers the digital audio player after people have paid bills electronically for two months. However, customers who do not use the service for at least a year must pay for the iPod.)

But Citi's promotion reveals how eager the New York company is to attract new customers, including those who will use only the Internet, and the iPod appeals to the same tech-savvy demographic group who might consider online banking.

"We find a great deal of success with tech promotions," said Catherine Palmieri, the director of Citibank.com.

And Citi's approach seems to be winning it customers who are comfortable banking without a branch. Ms. Palmieri said that 40% of the customers who apply for accounts online live outside of the bank's branch network.

Though it has not made a conscious effort to act like an Internet-only bank, Citi can serve people who do not plan to ever visit a branch, she said. "If you're interested in any sort of online banking or online bill pay, we think we have a compelling proposition for you."

For example, customers who apply online for Citi's EZ Checking account, which is heavily promoted through its Web site, do not have to pay fees for using non-Citi automated teller machines if they do not live near any of Citi's branches. Citi will also give the customer a refund if another bank imposes a fee for using its ATMs.

"You could use Citibank online for anything you want" while still using a local bank's ATMs, Ms. Palmieri said.

E-Trade Financial Corp. made a similar argument when it decided to allow free online money transfers, not to impose ATM access fees at non-E-Trade machines, and to refund any ATM fees from other banks. E-Trade said it did not want potential customers to feel their money was trapped in cyberspace.

Penny Gillespie, a senior analyst at Forrester Research Inc. of Cambridge, Mass., said that Citi is "competing neck-to-neck with NetBank and the periphery banks with that strategy."

Ms. Palmieri said one of Citi's strongest assets is its banking brand, one of the best-known in the world.

Even people who live outside its branch network have a Citi credit card, she said.

Chris Musto, a vice president for research at Watchfire GomezPro in Waltham, Mass., said Citi's approach could help it succeed where another online banking operation failed. He noted that Bank One Corp. (now a part of J.P. Morgan Chase & Co.) tried to start an Internet-only bank in 1999, and named it Wingspan to create a online brand.

The plan backfired because the Wingspan name was unknown, so it never caught on as an online bank, he said. (Wingspan was eventually folded back into Bank One in 2001.)

"Citi has a brand and a geographic reach that far outstrips their branch presence," Mr. Musto said. "It's well recognized in places where they do not have branches, because they've advertised nationally for a long time, because of Citi cards, and because of other businesses they're in that are not in their branch footprint."

Citi may have also solved one problem that has proved to be an ongoing challenge for other Internet banks: getting people to mail in their signature cards.

Gwenn Bezard, a senior analyst for the Boston market research company Celent Communications LLC, said that many online banks let people open accounts through the Internet but still require the customer to sign a piece of paper and mail it to the bank. This step often proves to be such an inconvenience that 75% of online applications are never completed, he said.

However, Citi is developing a system to address this challenge - it will capture the signature from the first check an applicant writes. (Wingspan tried to do the same.)

Mr. Bezard said Citi's setup could help increase the number of applications that are completed. "A number of banks allow you to open an account online, but the process may not be as easy as it is with Citi," he said.

Citi has also made itself highly visible online with an advertising strategy involving Internet search engines. Banks can bid for preferred placement with online search engines such as Yahoo Inc. and Google Inc.; the highest bidders' ads appear prominently on the pages displaying the results of a search. While this strategy is common for Internet banks, it is less so for banks with established branch networks.

Among banks with branches, Citi has made the top bid for Yahoo searches for the term "Web banking," according to Overture Services Inc., Yahoo's online advertising subsidiary. (Only ING Bank, an online bank, has outbid Citi.)

Now Citi is asking its online banking customers to go paperless. Ms. Palmieri said that two weeks ago it started encouraging its customers to switch to electronic statements, and 15% of its online customers have switched.

For reprint and licensing requests for this article, click here.
Bank technology
MORE FROM AMERICAN BANKER