Banks have so far uncovered more customer quirks than cost savings on the Internet.

Customers have confounded bankers' early hopes that the Internet would displace more-expensive delivery choices. It turns out that the on-line customer will use all available means, including traditional branches and telephones.

The upshot is that the Internet "is adding to the fixed IT (information technology) costs of supporting deposit customers," said Patricia McGuinness, managing director for financial services at Mainspring, Cambridge, Mass. "It's an entire other delivery infrastructure."

Knowing customers have a habit of using many channels is only the beginning of what bank strategists are realizing they need to know to be successful in this new medium.

Of all U.S. households, 4% use on-line banking (by direct personal computer link or the Internet), up from 3% in 1997, according to PSI Global, a research firm based in Tampa. The adoption rate slowed this year; from 1996 to 1997, penetration increased more than 2%.

Growth in the number of people who have PCs with modems-the primary target audience for on-line banking-slowed to 13% from 23% between 1996 and 1997. This market currently stands at 36% of all households, PSI said.

To get on-line banking off the ground, bankers are realizing they must delight customers with attractive offers for just the products and services they were thinking about purchasing, and at just the right time.

Even before doing that, they have to load their Internet sites with features that any savvy customer would expect: access to detailed credit card or mutual fund statements; loan applications and an immediate response; getting and paying bills; and buying stocks,

"It's possible to get all that out there," said Ms. McGuinness. "But it's wicked hard.

"Internet banking is falling short," she said, echoing the findings of a Mainspring report released this summer. "It's failing to deliver value because no one realized how hard it was going to be."

Raising the level of difficulty "by three to four dimensions" is the need for banks to adhere to the principles of customer relationship management-knowing customers and what actions to take to make them more profitable.

"Customer relationship management and e-commerce have yet to come together in any meaningful way, and they should," Ms. McGuinness said.

Despite such hard-edged evaluations from consultants, executives in charge of on-line banking initiatives are upbeat.

"Most of what we're doing today is working incredibly well," said Michael A. DeVico, executive vice president in BankAmerica Corp.'s interactive banking division, regarded as one of the industry leaders. "Customers are literally flocking to this channel-and we do very little marketing."

Mr. DeVico and his counterparts at other large banks said that if it were not for the investments they continue to pour into the Internet, this business would be turning a profit.

BankAmerica, which introduced Internet banking in mid-1996, more than doubled its number of Internet customers in 1997, and expects an increase of 60% by the end of 1998.

Including the customers of the merged NationsBank, BankAmerica serves about a million this way, Mr. DeVico said.

Instead of thinking about the Internet as a cost-saving medium, bankers are now gauging their success by the characteristics of customers who use Internet banking.

"The customer segment that leverages this channel is very profitable," said Mr. DeVico.

At First Union Corp., on-line banking households are twice as profitable as others, said Edgar D. Brown, senior vice president. "They also drop out less, and over a fixed period of time they buy more products per household."

The Charlotte, N.C.-based bank has "several hundred thousand" customers using Internet banking, which has been available since 1996 and is labeled Cyberbanking, thanks to First Union's early move for copyright protection.

At Huntington Bancshares of Columbus, Ohio, Internet customers have three times as many banking relationships as those who do not use the Internet. These customers "also tend to aggregate all their accounts so they can see them all in one place," said Chester L. Thompson, senior vice president and general manager of electronic commerce.

One customer in 10 is expected to be using Huntington's Internet service by the end of the year, said Mr. Thompson. By the end of 1999, he expects the proportion to rise to between 17% and 20%.

"We're much further along than I promised my bosses we would be at this point," he said.

Fleet Financial Group also has attracted on-line customers with "a disproportionate number of profitable characteristics," said Blaise Heltai, executive vice president and director of on-line financial services.

Fleet has enrolled 150,000 remote customers, including 30,000 who use its four-month-old Internet banking program. There is a correlation with overall profitablity: within some of Fleet's most profitable customer segments, 80% of the people bank on-line, Mr. Heltai said.

Divining what will attract consumers via the Internet is a major challenge. Many institutions have been following one of the prescriptions set forth by Mainspring, offering a wide range of products and services, particularly those that reflect the convergence of the banking, brokerage, and insurance industries. It is not lost on the bankers that on-line brokerage services led by E-Trade Group and Charles Schwab & Co. are rapidly and aggressively invading their space.

"Adding banking to the on-line channel is half a loaf," Ms. McGuinness said. "To be well positioned five years from now, you've got to open a lot more windows."

A first step for many banks has been to make credit card account information available on their Web sites. Huntington Bank, for example, contracted with Edify Corp. to install software that links to the bank's credit card processor and updates transaction information in real time.

Once it gets regulatory approval, Huntington will roll out on-line brokerage, a virtual version of its Huntington Investment Co. brokerage subsidiary formed in 1991.

"It will be as full-function as any other brokerage service you see on the Internet," said Mr. Thompson, and will offer services at reduced rates.

First Union, which recently became the first bank to deliver bills electronically over the Web, plans to implement on-line trading in the first quarter of 1999. The bank also plans to augment the credit card balance information it currently provides with statement details.

Fleet, which owns the discount brokerage company Quick & Reilly, has integrated on-line banking and brokerage in a "Web way," by linking the two sites, said Mr. Heltai. The goal is to allow customers to gain access to either site with a single password.

Banks are viewing the Internet as a rich field for experimenting with services that go well beyond providing basic account information.

Every quarter, KeyCorp analyzes its Internet initiatives to ensure they are living up to profitability expectations. One effort that did not pass muster and has been discontinued was a test of electronic-mail notification of stock price changes for private banking clients, said Patrick J. Swanick, vice chairman.

Fleet Bank pulled the plug on Internet-based student lending, a service that was tied to U.S. News & World Report's college surveys. But it is sticking with its family education network, in which Fleet co-sponsors and builds Web sites for school districts.

BankAmerica has had great success with a service that allows homeowners to estimate the value of their homes by researching recent property sales in their neighborhoods, for a $9.95 fee.

In the search for what will win the hearts and minds of customers, banks are placing the biggest bets on personalized Web sites.

BankAmerica's "Build Your Own Bank" feature, available since the Web site's launch, lets customers set up the site to reflect the way they bank.

It is only a first step toward the one-to-one marketing capabilities that Mr. DeVico envisions.

"Banks haven't even gotten to sophisticated one-to-one marketing yet," said Mr. DeVico. "The potential there is amazing."

Huntington plans to have such capability in place in the third quarter of 1999.

"With new software capabilities, we'll know you as an individual and your relationship with us," said Mr. Thompson. "With that knowledge, we can make unique value propositions. That's a pot of gold."

To be sure, banks face a raft of challenges in making their Internet channels thrive. One is the pesky electronic brokerage services, which have carried off "maybe one of the most successful financial product offerings ever," said Christopher Musto, senior analyst at Gomez Advisers Inc., Concord, Mass.

On-line banking is "not something that is taking everyone by storm," he said. "Bill-pay pales next to paying $20 commissions for trades."

If companies like E-Trade are successful in gaining a foothold on the Internet and establishing a brand they can use to cross-sell products, "that is a threat," Mr. Musto said.

Robert Hedges, senior vice president of Fleet's direct financial services group, warned about "the pace of consumer adoption" and the need to keep it "in sync" with retail banking profit and loss.

"Being early to market is not necessarily a good strategy." he said. "Behavior does not change that fast."

He added, "I'm very skeptical of there being big near-term opportunities for share gains and revenue growth through electronic channels."

The longer-term view appears rosier. "The value of this channel is increasing at an accelerating pace," said Mr. DeVico. "The investment we're making is clearly offset by the value we're bringing to the customer."

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