The home banking market is like a river at flood stage. Any banker venturing into it risks being swept away by a swirling torrent of vendor hyperbole and dashed against the rocks of speculative technology.
Not surprisingly, most bankers are standing safely on shore, waiting for calmer waters before launching home banking services. Of the banks that have introduced services during the past year, few if any have significantly penetrated their markets.
This raises some questions about marketing, technology, pricing, and implementation strategies.
During the last two years, CFI has helped about two dozen credit unions install home banking systems and assisted dozens of banks and credit unions in making informed buying decisions. Along the way, we have learned some lessons of value to bankers wanting to enter the swift current of home banking.
Determine your strategic intent.
We receive many inquiries from bankers who have not yet determined why they want to offer home banking. Basically, there are four reasons:
*To provide better service.
*To strengthen customer loyalty.
*To support a core strategy of expanding retail delivery channels.
*To generate fees.
Offering home banking to enhance customer service and add a new delivery channel makes a lot of sense in today's environment of declining branch office transactions. One of our clients, a start-up credit union, is taking this approach to an extreme. Its members are geographically dispersed, so it chose home banking as its primary delivery channel and it never intends to open a branch office.
Home banking also is a strategy for reinforcing customer loyalty and reducing opportunities for nonbank competitors to seize control of your customer relationships. One of our clients reports that home banking customers are more profitable than other customers, because its home banking customers maintain more accounts, have larger account balances, and use more services.
In contrast, a focus on generating fee income may limit your success. Fees and other charges place roadblocks to customer acceptance and make new banking products and services less competitive. Charging transaction fees and forcing users to bear the cost of purchasing certain types of hardware or software for home banking tends to restrict your market to a smaller segment of upscale customers.
In return for paying fees, your customers may expect your home banking service to offer significantly greater functionality than that of your competitors. In the near term, a focus on generating fee income may add to your bottom line, but be prepared to compete in a future market where home banking access is free to the customer.
Set realistic expectations.
The first step in implementing a home banking system is to set realistic expectations about both short- and long-term market penetration, because you are likely to make significant changes to your system over time. Our most successful clients have achieved over 20% penetration of their customer base within three years, and that is probably a safe target for most institutions. Be sure to spread your marketing dollars over several years, because the initial sizzle of home banking will fizzle if you do not consistently reinforce your promotional messages.
Talk to your customers.
Home banking requires your customers to change their behavior, and measuring their willingness to use a new delivery system can help you develop a more-focused implementation strategy. The best method for gauging their acceptance of home banking is through a survey.
Some of our clients use simple direct mail surveys, distributing them outside the normal statement cycle and using follow-up mailings to generate a high response. Others conduct personal interviews with customers, enlisting their tellers, customer service representatives, and loan officers to ask the following questions:
*Do you own a PC and modem?
*Do you have access to a PC at work?
*Would you use a PC-based home banking system that allows you to check account balances, review account history, transfer funds, and pay bills?
*How much would you be willing to pay each month for such a service?
Select the right technology.
As you explore home banking systems, you will need to analyze and select the mix of access methods, software products, and delivery systems that produce the highest market penetration at the lowest cost. Forcing customers to make buying decisions can limit the appeal of your system, so you must accommodate both existing and developing technologies in all ranges of sophistication.
As you explore the home banking market, you probably will discover close to a dozen different access methods, such as VT-100 compliant hardware devices, Windows-compatible PCs, and the Internet. However, not all are equally available to consumers.
You also will identify a number of software technologies used by the access devices, such as screen phone technology, MS-DOS, and Windows-based financial management products. Again, some are more widely used than others.
The more access methods and software technologies your home banking system accommodates, the better your chances of maximizing your market penetration.
One regional bank that recently committed to a single-point access method with limited software technology signed up 3,000 home banking customers after six months of offering the service. One of our clients, on the other hand, signed up over 7,000 customers in its first two months of home banking, largely because its system supports a much wider range of access devices and software technologies.
Think about the future.
There are three types of home banking systems available: in-house proprietary, switched networks, and service bureaus. As you explore these systems, consider if they are flexible enough to support not only existing bank products, policies, and technologies, but also changes to your banking environment.
As your home banking service grows, you must be able to quickly and cheaply change screen contents, add new bank products and information, turn certain functions on or off, and make other modifications. You can make these changes easily to an in-house system, but flexibility is less certain on a switched network.
Upcoming enhancements to home banking systems will make long-term flexibility even more important. Within a year, some home banking systems will allow your customers to apply for loans or open new accounts. These functions will require on-line documentation that is governed by regulatory issues and by unique institution, product, and customer information.
From a cost standpoint, each type of home banking system has different advantages and disadvantages. A switched network is less expensive initially, because you do not have to pay for additional hardware and software. But it can become increasingly expensive in the long run, because the networks usually charge fees for each customer, transaction, and function.
The cost structure for in-house proprietary systems is just the opposite. You pay initially for hardware and software, plus annual maintenance fees, but little or nothing for new customers and additional transactions. As a result, you can add customers and functionality without significantly increasing costs. Generally, the three-year cost of an in- house system is less than the cost of using a system that strictly charges fees for customers, functions, and transactions.
The cost for using a service bureau solution falls somewhere in between those of the switched network and in-house systems. Service bureaus offer low entry costs, but you will pay by customer and transaction, though usually not as much as you would through a switched network.
Retool your attitude.
Bankers and their consultants spend a lot of time dwelling on the cost benefits of home banking, because they often want home banking to pay for itself. It is true that home banking transactions cost a fraction of teller transactions, that home banking customers tend to have more accounts and maintain higher balances that other customers, and that home banking customers tend to stay with the institution longer.
But it is also true that home banking is an additive technology, not a replacement technology. To the home banking customer, the PC is just another delivery system, not the only delivery system. These customers will generate more business for your bank, but that does not mean fewer transactions. In fact, they are likely to contact you more often to open new accounts, apply for loans, and inquire about various services.
Your staff needs to demonstrate home banking, and to be able to explain certain technology issues, on-line bill payment procedures, and what to do when problems occur. Therefore, you will need to retrain your staff to address home banking issues and to take advantage of new selling opportunities.
Enjoy the ride.
Like a trip down a whitewater river, home banking gets everyone fired up. The technology for banking on-line is here to stay, so your decision no longer about whether to enter the waters, but how.
You will probably hit a few rocks along the way, but you will have a much smoother ride if you size up your market properly, adopt the most widely used and flexible technology, keep your prices low, and make sure everyone at your institution is on board.