The financial services industry is littered with banks offering electronic services. From giants like Bank of America and Citigroup to Third National Bank in Sedalia, Mo., everyone is in the game.
What have we learned from our experience in this new distribution channel?
On the surface, the justification for electronic banking is compelling. It is relatively inexpensive to offer, with many vendors providing complete outsourcing options. Since on-line customers can do more things on their own, it is expected they will visit branches and phone call centers less frequently, which reduces service costs.
On-line banking also offers opportunities for additional revenue from sales of new products, customer acquisition, and higher account balances. Most important, it can aid customer retention, not to mention segmentation - guided by delivery-channel preferences and other metrics gleaned from customer data. Finally, and most likely, many banks are offering electronic banking because their competition is.
Consumer adoption of on-line banking, however, has not been as quick as originally estimated, and predictions of what the big revenue drivers would be have proved wrong. By most estimates, 3% of the industry's consumer customers are banking primarily through the Web, and customer acquisition is trailing off.
Additionally, most on-line services that banks thought they could charge for are now free - except bill payment, which is often free to premium customers. Most customers pay $5 to $10 a month for on-line bill payment; bankers had thought they would be able to charge $10 to $15 just for basic service and tack on bill payment fees.
Customers have not stopped using other channels as much as bankers had anticipated. Why should they? There are few penalties for visiting a branch or phoning the call center. Rather than switch channels and do the same amount of transactions electronically, customers are making more transactions. And because transaction volume is higher, unit service costs are lower on the Web but aggregate costs have risen.
Bankers should not be surprised by these results. To the customer, on-line banking is a limited-value proposition. Unlike Web-based stock trading, where customers save money over traditional broker-based trading by directly accessing the equity markets, electronic banking offers no financial benefit to customers. The time saved is negligible, since many on-line banking features have been available by phone for years.
Direct debit transfers through the automated clearing house are easier to use than electronic bill payment and require no action on the customer's part. And in most instances direct debit services are free, unlike electronic bill payment. Electronic bill payment still requires a check to be cut, in most cases by a third party. With this service, the customer loses some control over the payment process and the bank loses some control over the customer experience. That is not necessarily in the bank's best interest, especially if there are errors.
Many banks are left in strategic limbo. There are differing opinions on whether electronic banking is a product or a channel, and each approach has its own management and organizational issues that need to be addressed. No matter how e-banking is managed, it is important that the customer be managed carefully, not lost in the bureaucracy.
I recently had the opportunity to work with the Wharton Financial Institutions Center on electronic banking1 research. We found that these customers are younger, more profitable, use more products, and carry higher average balances than off-line customers. Demographics proved to have little influence on the differences in profitability and product usage between e-banking customers and regular ones. These findings indicate that electronic banking is more valuable in supporting a customer retention strategy rather than an acquisition or cost-cutting strategy. It has also demonstrated the ability to retain high-value customers. However, the number of customers who have migrated is still very small. More work needs to be done to identify high-value customers' preferences and develop strategies to keep these customers.
In an increasingly competitive market, banks need to use all the tools available to them to make better decisions. A clear strategy for learning about customers - and the performance of distribution channels and lines of business - is essential. Mr. Solomon is a consultant in the Washington office of Tillinghast-Towers Perrin, a financial services management consulting firm based in New York.
