Combining down-home service with high-tech functionality, small banks offer online shopping.

With the ongoing shakeout among dot-com retailers, selling things over the Internet has become a less popular business model for start-up technology firms. Nonetheless, plenty of America's smallest financial institutions are investing in technology that would effectively turn them into miniature versions of Amazon.com

Over the past six months, thousands of community banks, small regional banks and credit unions have added retail business-to-consumer and business-to-business "electronic marketplaces" to their Web sites, allowing customers to shop online through links to Web-based suppliers or to a single merchant. Such marketplaces are familiar features on popular Internet portals such as Yahoo and Lycos.

Bankers believe e-marketplaces can drive revenue in two ways. One is by creating new revenue streams, such as charging merchants a hosting fee or sharing revenues with the vendor. The other is by leveraging their "high-touch" community feel onto their electronic channels by offering more targeted and local content on their Web sites, thereby increasing "stickiness."

For small institutions, online marketplaces also are part of a strategy to build what information technology developers are calling "financial destinations," as opposed to portals. The aim is to create "stickier" Internet banking sites that leverage smaller banks' "high-touch," community appeal.

"Community banks entered Internet banking defensively, but we think they actually have a competitive advantage there," says David Dobronsky, senior vice-president of ecommerce with Q UP, an Austin, TX-based software developer and S1 Corp. subsidiary that recently added online shopping to its Internet banking products for small banks. "They can compete on accountability."

Electronic marketplaces are the latest addition to a substantial armory of Internet weaponry that small banks are deploying in the ongoing digital banking war. Their arsenals are generally supplied by the same vendors who got their banking Web sites up in the first place and followed up with fully integrated, value-added applications like bill payment and external product sourcing.

These suppliers, by offering integrated solutions at affordable prices, are helping to turn small regional and community banks into "light armored units that can pick off attractive targets while dodging big threats," says Brook Newcomb, a senior e-banking analyst with Cambridge, MA-based Forrester Research Inc.

The latest of these tools are integrated ecommerce portals that offer online shopping links for both consumer goods and bank-branded financial products. Vendors generally offer individual banks customized templates linking them to the vendors' national network of online retail suppliers, and usually split their commission revenue with the host bank. The sites can also generate advertising revenue.

Two specialty suppliers of Internet banking applications to the small bank market recently launched such "electronic malls" as part of their packaged Web site service. Both will also allow the banks to tailor a "community mall" on the site featuring local merchants, many of whom are business banking customers without a Web site or ecommerce capability of their own.

But analysts are divided over the likely benefit to small banks of entering the e-retailing and portal marketplaces. Newcomb, for example, dismisses portals as uneconomic for community and smaller regional banks.

"What drives revenues at these things is traffic, and community banks don't have traffic," he says. "Community banks are probably just getting into online shopping because it's hot right now."

But Randi Purchia, retail e-finance analyst at Newton, MA-based Meridien Research Inc., believes the strategy could succeed, especially if community banks target local merchants and shopping trends. In a recent report, she writes, "The morphing of retailing and banking is picking up speed," citing recent improvements in Web site shopping by IT-savvy retail superbanks like Bank of America, Citibank and Wells Fargo.

"It's a positive trend for community banks," Purchia says. "Offering Internet-site shopping is a source for continuing and extending their closer relationship with the customer. It's a way of putting their local focus online."

Q UP, which has 410 Internet-banking customers with average asset size of $285 million, introduced an ecommerce portal in April. One month later, according to Dobronsky, Q UP had signed contracts to launch the portal in 50 financial institutions. The product allows banks to offer transactions, localized content, a national electronic shopping link and a local, customizable mall. Community merchants who join the bank's local mall also can join the national shopping mall.

Q UP charges the bank an undisclosed initial license fee and ongoing monthly fees based on the number of log-in IDs. It aggregates all advertising and inventory revenue, which Q UP collects through commission deals with online merchants, and splits it with the bank. Dobronsky says the application also cuts banks' marketing costs by offering targeted products online.

Marietta, OH-based Peoples Bancorp Inc., which operates in Kentucky, Ohio and West Virginia, is among the first of Q UP's Internet banking customers to sign onto the shopping link. Peoples Bancorp has assets of $1 billion and serves 56,000 households through 38 branches and 25 ATMs.

Internet Banking Manager Alison Thompson says the decision was based on Peoples' aim of becoming the proverbial one-stop shop for its customers.

"It helps level the playing field and allows us to compete with the larger banks," she adds. "The local shopping link should be a key revenue-generator and further strengthen our ties to our communities by helping local merchants expand globally."

Also in April, Calabasas, CA-based Digital Insight, which has 880 banking customers with assets under $10 billion, announced an alliance with e-business software developer Iconomy to offer a "global store" for retail banking customers as part of its AXIS ecommerce application. As well as 20 categories of consumer products, the store will sell financial products, such as insurance and investments, that banks can brand separately and that can feature local news content.

Digital Insight also has formed an alliance with Orbit Commerce to create a b-to-b storefront targeted at the banks' small-business customers.

According to Tej Mariyappa, Digital Insight's director of ecommerce, the firm had "more than 20 orders placed" for its new product, which also includes local news, an online trading and brokerage service, and financial products including loans and insurance.

Glastonbury, CT-based Open Solutions Inc. two months ago had signed up 140 of its small-bank IT customers to its online shopping sites launched late last year. The company targets banks with assets of less than $3 billion, according to Chief Executive Officer Louis Hernandez, and charges a monthly fee based on asset size.

Hernandez says the fee starts at $2,500 per month and claims banks need "only 2% or 3% penetration rates for Internet banking" to break even on the venture. Open Solutions' sales for the first quarter of 2000 were triple those of the previous quarter, and the company increased its sales force from 7 to 30 over the same period.

But credit unions take the prize as the fastest devourers of online shopping services for their Internet users. Although operating for less than a year, CUShopper Inc. by May had signed up 1,500 of the nations 10,000 credit unions, three times the number of customers the Burbank, CA-based vendor had at the end of 1999.

Adam Wicks Walker, chairman of CUShopper, believes the company can eventually establish links with the majority of credit unions that have Web sites, currently around two-thirds of the total.

CUShopper is different than what bank technology vendors are offering. It costs credit unions nothing to hook their Web site, via a co-branded icon, to the company's server. And it sells products like computers, jewelry, travel packages and new cars that credit union members typically take loans to buy.

When a member clicks on a product he wants, CUShopper offers financing through the member's credit union. The site also allows credit unions to source new financial products through strategic alliances with third parties.

The company chose to become a merchant of record, like Amazon, rather than establish links with major retailers. "It's harder that way," Walker admits. "But eventually we believe ecommerce will settle out into those who do business and those who don't, and we see the credit union market, at 78 million members, as absolutely enormous."

McDonnell-Douglas West FCU, a Huntington Beach, CA, credit union, put CUShopper on their Internet site in December as a way to stimulate demand for personal loans.

"So far the response has been good, and we're not disappointed with it," says Chris Schaller, the credit union's promotion coordinator. "It's a good way to encourage our members to do more business with us-we're not in the business of selling things ourselves."

Although unfamiliar with CUShopper, Purchia of Meridien Research is upbeat on the concept. "It sounds like they're getting close to understanding how to provide the kind of value to the customers that adds directly to their own bottom line," she says.

However, not all IT developers are so bullish about online shopping. New York-based vendor Immersant Inc., formerly Bowne Internet Solutions, previously focused on large financial institutions. Trevor Hursthouse, vice president of banking and finance, says the company is now researching its proposed entry into supplying template-based Internet solutions to banks with less than $1 billion in assets.

But online shopping links are unlikely to be part of the mix. "Banks need to tread lightly with these things, because people come to banks to bank," Hursthouse says. "Something that's hit-or-miss like online shopping could put some of their customers off."

McLean, VA-based Online Resources & Communications Corp., which has sold integrated Internet banking solutions to more than 400 financial institutions in the $500 million to $10 billion asset-size range, also offers a shopping link as part of its Services Gateway. But CEO Matt Lawlor is more guarded about its future. "We've only just started offering e-marketplaces and, quite candidly, I don't really know what will work in that area," he says. "In the end, community banks are best served by serving their communities well. Rob Luke is a business writer in Indianapolis.

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