Citigroup Inc.'s renewed focus on integrating its Internet banking operations appears to have botched up its first, well, integration of the New York financial company's two electronic banking programs, Direct Access and Citi f/i.

In June, Citigroup announced it was unplugging Citi f/i, its standalone, retail online bank introduced in August last year, and folding it into Direct Access, its established, full-service Internet service.

The new combined service, to be re-branded as CitiDirect, has 1.1 million customers in 22 countries, according to New York-based Citigroup. Citi plans to expand that to 30 countries by year-end.

Internet banking analysts generally give Citigroup's decision the thumbs up, despite some earlier negative industry reaction.

The decision to merge the e-banking systems was one of Citigroup's first steps along a new path for its Interent banking operations. Its direction and objectives were revealed in a July 20 report by Deryck Maughan, the company's Internet operating group chairman, entitled "Citi on the Net."

Citigroup's main banking objective is "providing customers with a wide spectrum of products and services-anywhere, on any device, at any time, in a secure and private manner," writes Maughan.

The report (see sidebar on page 6) states that Direct Access, which also offers discount brokerage, will also be available this fall on what it calls "an enhanced banking and brokerage site." That site will offer "the best features of...Direct Access...and other online offerings."

The report makes no mention of e-Citi, Citigroup's Internet banking unit that operated services like Citi f/i and Direct Access. Citigroup Internet banking executives were unavailable to comment on this story, a company spokesperson says.

After the decision to combine Citi f/i and Direct Access was announced, some experts initially painted Citigroup's Web strategy as uncertain and underachieveing. New York-based consultant Bernell Wright told a Thomson Financial Media reporter in late June: "This move suggests that (Citigroup) has never quite figured out how to fit online financial services in with its more successful credit card and consumer banking efforts."

Such reactions reflect the role that the reported struggle between former Citigroup co-chairmen John Reed and Sanford Weill for control over Citigroup's future strategy played in the Internet banking decisions. Analysts say Reed liked investing in largely independent, technology off- shoots like e-Citi, which formerly ran the group's electronic banking operations. Weill preferred keeping business under one roof.

But Citigroup's decision to merge the two makes sense considering the direction most other banks are headed, other industry watchers contend. They believe Citigroup, like other banks, now accepts that most banking customers want the Internet to work in harmony, rather than in competition, with other channels.

"My personal opinion is that the merger (of Citi f/i and Direct Access) is a good move," says a partner with the financial services industry practice in Chicago.

Integrating the Internet channel into its distribution network makes sense, he adds, given that "recent experiences of financial organizations show that the key to success is having a physical and a virtual presence."

Sellers says Citibank is going the way of other major retailers like Wal-Mart in offering a fully-integrated Internet service. For Wal-Mart, that means a customer can order a television online, then drive to the store and pick it up, he adds. Citibank hopes to deliver the same kind of service to banking customers, he says. But until recently, he pointed out, e-Citi customers who walked into a Citibank branch weren't able to do any business there.

Other analysts agree that combining Citi f/i into Direct Access is a strong step by Citigroup in consolidating their e-banking operations. That's because Citi f/i, like other recently launched Internet-only banks, had not lived up to expectations.

"Direct Access has the more solid base-they have a lot of customers and longer experience running a full-service operation," says Shaw Lively, a research manager for online financial services at IDC Corp. Direct Access started as a private PC-based service in 1984; Internet service went live in 1997.

Jennifer Schmidt, an analyst at Newton, MA-based Meridien Research Inc., says that Citigroup's decision will be good for customers. "The integrated approach Citi is taking is smarter because it gives customers more options. Your customers are always happiest when they can do whatever they want, whenever they want, however they want."

She calls Citigroup's decisions to scrap e-Citi and re-brand the merged Internet-banking arms to reflect its combined benefits "the logical thing to do."

Yet despite its 100 million customers in 100 countries, Citigroup faces challenges in the brave new world of integrated-channel retail banking.

For one thing, although Citi claims 5.9% of those customers have "online relationships," analysts estimate that only about 1% actually conduct transactions online. Although they lack Citi's global reach, Bank of America Corp., Charlotte, NC, and Wells Fargo & Co., San Francisco, have attracted many more e-banking customers.

Sellers says BofA has moved ahead in Internet banking because of a decision two years ago to shift all the electronic channels of the merged BankAmerica and NationsBank to NationsBank's superior technology platforms. "That has made channel integration a lot easier for them to solve," he says.

In addition, bigger banks like Citi face much greater logistical problems integrating their channels than a bank of smaller size. "Mid-level banks in the $20 billion to $40 billion asset range are in a better position because they have much fewer technology platforms to worry about," Sellers says. "That's one of the difficulties large mega-banks have with integration-some will have five different systems just for checking accounts."

Nonetheless, the analysts agree that Citibank had little choice but to go with the flow of a rapidly evolving ecommerce marketplace. And Lively points out that now Citibank, with 100 million customers in more countries than any other bank, has shifted course, stand-alone Interent banks will come under further pressure.

"E*Trade Bank has grown to about 220,000 customers in a few months and they're getting a lot of market coverage," he says. "That's a pretty decent growth rate, but to Citigroup that's like a branch in Hoffman Estates, IL."

Rob Luke is a business writer in Indianapolis.

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