Banks Wrestle With Intangibles in Measuring Profitability Of Web Services

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Though online banking does not generate much of a return at most mainstream banks, they say their virtual interactions with customers have benefits that can-not be conveyed in revenue statements.

"We do close a lot of business online, but is it enough to pay for the site? Probably not," said Tim Scholten, the senior vice president for direct-access banking at Huntington Bancshares Inc.

The Columbus, Ohio, company was an early mover in online banking-it rolled out the service in 1996-and it has found that web-savvy customers "keep more money with us, they borrow more money from us, and they stay with us longer," Scholten said. "We see the online channel as driving profits for the entire customer interaction."

Scholten said money saved is a better measure of e-banking than revenue produced. Online transactions cost Huntington less than five cents apiece, he said, compared with about 10 cents per transaction placed through automated call centers and around $4 per transaction done with a teller.

No Profit Opportunity Seen

Len Pagon, the president and chief executive officer of Brulant Inc., said 71% of the 105 senior bank managers the Cleveland consulting firm recently surveyed told it that they do not see the Internet as a profit opportunity. "Most people said they consider the web as a channel as an expense instead of an investment that can generate a meaningful return," he said.

More customers have come to expect online banking, however, so banks dealing with a rough economy have to deal with budgeting for the installation and maintenance of online banking. They "are struggling with how to justify more expenses," Pagon said.

Pagon is among those who say banks are garnering several intangible advantages from offer-ng online services, with high customer retention rates near the top of the list.

One company turning a profit from e-banking is NetBank Inc. Eve McDowell, the Alpharetta, Ga., company's chief sales executive, said its business model emphasizes extremely low operating costs, which explains why it has just 150 employees and no walk-in branches. "Our expenses are just not the same" as those of conventional banks, she said.

'Small' Banks Unveil Sites

Many smaller banks are late arrivers to online banking. These include Troy Savings Bank in upstate New York, which plans to unveil its consumer banking website this month, said Michael Mahar, a senior vice president. The $1.2- billion-asset bank has offered e-banking to commercial customers for more than two years, so most of the infrastructure is in place.

"I think the jury is still out on the retail side of online banking," Mahar said.

Though it probably aids customer retention, he said, he is "hard-pressed to find any bank that's making a profit in that channel."

Muriel Glick, the vice president of marketing at the $250 million Devon Bank in Chicago, said a larger bank will have an easier time supporting a cyberbranch. "It's not cheap, and it's very labor-intensive," she said. But "online banking is an added expenditure that we need in order to remain competitive."

Devon began offering account information on its website in the fall of 2001 and is just now introducing online bill payment. Glick said the service has made for stronger customer relationships.

"Whether it has the potential to become a money maker remains to be seen," she said.

Another Way To Examine Return

George Tubin, senior analyst at TowerGroup Inc., a research house in Needham, Mass., said profitability should be measured by customer. "It's extremely difficult to keep track of the costs and profitability of a single channel," he said. "Most institutions are not measuring the performance of online banking appropriately."

Tubin concurred that e-banking customers are less inclined to defect and more inclined to consolidate their accounts at one entity. "They start looking at their online bank as their primary banking provider, and that's nirvana for the banks," he said.

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