Banking by personal computer is a growing business, but it is not in the same league as other parts of the burgeoning Internet economy, the American Banker/Gallup Consumer Survey indicates.

The portion of U.S. financial consumers who said they had performed on- line banking transactions jumped to 8% in March 1999 from 6% in the fall of 1997, when the previous survey was conducted.

Though the one-third rise, to roughly seven million households, is clearly significant, the number of people being won over to home banking is well behind households with personal computers, which rose to 63% in the Gallup poll from 50% in 1997, and total Internet users, which increased to 69% from 37%. Subscribers to on-line services such as America Online are up to 60%, from 46%.

The general growth in PC households does pull home banking along. If not for the fact that PC ownership is expanding, there would be no growth in on-line banking customers. The percentage of PC users attracted to home banking held steady at 12%.

Such a statistic could be a sign that PC banking will plateau. Though the exact timing and final percentage are uncertain, it stands to reason that there will come a limit to PC ownership somewhere short of the 98% or 99% penetration of telephones, and the banking usage pattern is lagging.

"The more mainstream the Internet gets, the less inclined people may be to get involved with Internet financial services," said Laura Starita, an analyst at GartnerGroup of Stamford, Conn. "The degree to which the mass market is comfortable with electronic mechanisms for transactions is minimal. As more consumers get on-line, the average consumer is not as sophisticated and is less technology-savvy."

Growth in one of the mainstream on-line channels, the America Online network, has not subsided. Its subscribership is approaching 20 million. The Yahoo portal has an audience estimated at more than 60 million worldwide.

Zona Research of Redwood City, Calif., recently reported that 44.1 million people in the United States shop on-line, with another 37.5 million intending to go on-line within a year.

International Data Corp. of Framingham, Mass., currently projecting $1 trillion of total Internet purchases and 183 million World Wide Web users in 2003, has also produced the estimate that 32 million U.S. households will be banking on-line that year.

The American Banker survey covers only households with at least one type of financial account. This excludes so-called unbanked people, who are believed to comprise 10% to 15% of the roughly 102 million U.S. households.

The 12% of PC households in the Gallup survey that said they had done home banking translates to 8% of the financial households and about 7% of all households, extrapolated.

If there are seven million U.S. home banking households - International Data pegged it at 6.6 million in 1998 and other researchers are in the same ballpark - then the business is dominated by a few leading institutions.

Wells Fargo & Co. and Bank of America Corp. have about 2.5 million between them. Wells has said it is enrolling 80,000 a month. Internet-only banks are also reporting rampant growth, though on much smaller bases: Net.Bank of Atlanta doubled accounts between January and June, to 35,000.

Less talked about is the question of how many people who sign up for the service stick with it. Attrition in general Internet usage, and in financial services specifically, has shown up in various studies. The number of American Banker/Gallup respondents who say they have used PCs for "keeping track of checking accounts, credit cards, or other financial matters" has declined from 49% in 1995 to 41% this year.

Major banks report higher-than-average retention rates and profitability in their on-line businesses.

"Some of our most profitable households are the ones that bank on-line," said Kelly Scott, senior vice president and director of electronic channels at First Union Corp., which has 750,000-plus enrollees. "We also know they are high transactors," she said, adding that their attrition rate is half that of other customers.

"The big banks have converted a lot of customers - and then you've got the rest of the world, including community banks that don't have on-line servicing," said Grande Bucca, who heads the electronic commerce task force of Booz-Allen & Hamilton, the New York-based management consulting firm.

Not surprisingly, PC ownership and on-line banking experience remain highest and continue to rise among the upscale. Of those with incomes over $75,000, 85% have a home PC, the American Banker survey said, and 21% of the owners have used a computer for banking transactions.

Also unlikely to surprise: Internet usage and PC ownership are greatest among people between the ages of 18 and 44 - Baby Boomers and Generation X- ers.

But the growth is across the board, enabled by advances in technology and lower costs. Nine-tenths of the 63% of households with PCs - 56% of financial households - have modems with their hardware. That is up from 39% with modems in 1997.

To gain their share of these increasingly wired consumers, banks need to act aggressively to get them over the initial hurdle of trying on-line services, said Dan Latimore, financial services industry director of Mainspring, a Cambridge, Mass., consulting firm.

A problem for banks in trying to get beyond the open-minded early adopters of technology and into the mainstream consumer market, he said, is that"there isn't that much in banking that you can do on-line."

"Some people are saying that once bill presentment and payment get up and running, that may bring in a lot of consumers," Mr. Latimore said. "But banks already have on-line payment, and that doesn't really drive a lot of customers."

Mr. Latimore said the creation of separate Internet-only offerings, such as Bank One Corp.'s WingspanBank.com, could help.

"When banks start to differentially price their Net banks from their traditional operations, customer growth will increase," he said.

On the bright side, the percentage of PC owners who said they were interested in on-line banking rebounded to 52% - about where it was in 1995 and 1996 - after a potentially worrisome decline to 44% in 1997.

Also positive for bankers is the less-than-stellar performance, as perceived by consumers, of newfound on-line brokerage competitors.

The percentage of banks' on-line customers who said they were "very satisfied" with the service was 59%, closely tracking the 60% of all financial consumers who said they were "very satisfied" with their principal institutions. (Commercial banks alone came in at 58% on overall satisfaction.)

Only 33% of on-line trading customers said they were "very satisfied." The result - like that for on-line banking - is not statistically solid because of the small sample of respondents in these categories. But the relationship between the numbers is telling.

Even so, on-line brokerage reputations, from Charles Schwab & Co.'s and E-Trade Group's on down, have not seemed to suffer from well-publicized and embarrassing service outages this year - an indication that in an early- adopter market stage, the public tolerates glitches.

Experts said it is important to note that on-line banking and on-line brokerage are different animals.

"If you are operating under a paradigm where minutes matter rather than days, there is much less room for error," said Mr. Latimore. "On-line brokerages have a higher hurdle to leap."

When on-line bank customers who were less than "very satisfied" were asked why, 36% cited slow connections and log-on times, 29% said the service was difficult to use, and 7% mentioned interruptions and breakdowns.

First Union heard speed and reliability complaints and revamped its Web site about six months ago, simplifying graphics and navigation, Ms. Scott said. Those complaints have since dwindled to near zero, she said.

Now First Union gets its largest number of complaints about bill payment services - how they work and why a payment may have been misapplied.

Banks may be able to make hay on their full-service reputations, and on the fact that half of consumers still consider a bank to be their No. 1 financial service provider. Only one respondent in the 1999 survey - a male between ages 55 and 64 and over $75,000 in income - listed an on-line broker as his main financial institution.

"That seems to imply that on-line brokerages are a place for excess cash or trading capital, rather than core assets," said Mr. Latimore. "I think right now banks' ace-in-the-hole is their physical presence."

Ms. Starita of GartnerGroup said the data "reinforce the message" that the on-line opportunity is the banks' to lose. "It will be there if the banks just step up to the plate," she said.

Traditional financial institutions have three potential advantages over Net brands, said Mike Weiksner, a financial analyst with the New York market research firm Cyber Dialogue: "The ability to conduct on-line transactions, an existing customer data base, and in-depth financial services expertise."

As on-line brokers diversify with banking and other offerings, as E- Trade is doing with its acquisition of Telebanc Financial Corp., it becomes ever more critical for banks to stay ahead of the curve by developing a compelling service package.

Mr. Weiksner, citing a Cyber Dialogue study with Booz-Allen, said 86% of on-line financial service consumers view the ability to see account information as important. Also, 85% said electronic bill payment and presentment are important, and 78% said the same about research, reflecting the popularity of on-line investing.

A weakness was that 31% were not satisfied with the e-mail assistance they received, though 75% said an e-mail "help line" is important to them.

Mr. Weiksner said "service can be the differentiating factor. On-line customers desire the same one-on-one attention they would receive if they physically walked into their neighborhood bank."

Some experts are thinking about what a downturn in the stock market might do to the on-line trading phenomenon.

"I believe the Web will change the way people do business," said Belle Horwitz, vice president of finance industry consulting for the Americas at International Business Machines Corp. But she said she wonders how much the on-line trading strategies and sense of urgency are influenced by "the dynamics of the stock market."

"For many people it has replaced Las Vegas," said Charles M. Farkas, director of the global financial services practice at Bain & Co., Boston. He said it would serve banks well to emphasize their historically solid reputations and steer clear of the day-trading mentality.

"We think it should be a financial institution at the center of the customer experience, and there is no way that an on-line brand like Lycos or Yahoo can replace the brand equity that banks have built up over 200 years," said Ted Spooner, chairman and chief executive officer of Corillian Corp., an on-line banking software vendor in Beaverton, Ore.

"We think it is important that this activity is done in contact with a financial institution Web site," Mr. Spooner said.

"I don't see even 20% of the wealthy segment ever becoming fully committed to the E-Trade type of broker," said retail financial services consultant Peter Carroll of Oliver, Wyman & Co. "There is still a lot of advice people will want to get."

At the same time, higher-net-worth investors who understand the risks they are taking "have a different set of financial goals that shape their attitudes," Mr. Farkas said. "People are likely to see a Schwab, Fidelity, or Prudential as trustworthy."

Though banks may enjoy a preeminent position as primary financial institutions, they shouldn't be complacent, Ms. Scott of First Union said, "because the Transpoints and the Schwabs aren't." (Transpoint is the joint billing services venture of First Data Corp., Microsoft Corp., and Citigroup.)

Ms. Horwitz of IBM said another challenge banks must face is in integrating Web initiatives into overall business strategy. Companies such as Chase Manhattan Corp. and Citigroup, and others less large, have attempted to address this by establishing dedicated, Internet-focused units.

"We see people treat the Web as a separate delivery channel," Ms. Horwitz said. "They don't know how to integrate it with the rest of their organization."

Too often, she said, "it is a distinct channel, not integrated, not effective as a marketing tool, and not cost-effective." u

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