Financial institutions on the Internet have a lot to be proud of. Within a few short years, these pioneering companies have enabled their customers to trade stocks, pay bills and buy insurance, all with the click of a button.

Well, stop patting yourselves on your backs, says Arthur Andersen. In its study, Measuring eBusiness Effectiveness in the Financial Services Industry, the accounting and consulting giant examines the state of the various financial services available on the Web today and concludes the majority still have a lot to learn when it comes to doing business online.

The study looks at 102 Internet financial institutions, including 13 asset managers; 34 banks; 14 brokers; 23 insurers (18 individual insurers and five aggregators, combined); and 18 lenders. Sites were evaluated based on ease of use; functionality and content; overall site sales and marketing; application processing and fulfillment; and ongoing customer service.

No industry segment scored higher than 40% overall on the study's measurement criteria; that includes brokers, the high-profile darlings of Internet financial services (see chart below). "I don't think (online financial services companies) have a realistic view of what this is all about. If you look at processing and fulfillment, it's not there," says Cary Serif, an Andersen consultant and one of the study's authors.

The main culprit for this lack of functionality should come as no shock-legacy systems. Most of these companies are so entrenched in their old systems that they sometimes don't want to bother Web-enabling them. "This diminishes the customer experience. Most companies are focused on simply 'being out there' and very few thought out the process and know where to go," Serif says. "A lot of banks are not convinced they'll make money on the Web, so not many are going beyond tentative testing."

Indeed, many institutions haven't moved beyond the "brochureware" stage of Web development, where sites offer little in the way of transactional capabilities. Among banks alone, 82% of bank sites evaluated in the study fall into this category, according to Andersen.

While Andersen's findings are dramatic, not all experts concur with them. "Eighty-two percent sounds like an awfully high number," says Meredith Hickman, an analyst with Celent Communications, Cambridge, MA. "Banks have come a long way in the last two or three years." Celent's numbers show that half of all banks with $6 to $10 billion in assets offer online banking services.

"If you look at the major banks with major market share, they're all doing things online well beyond brochureware," adds Paul Jamieson, senior analyst with Boston-based Gomez Advisors. "Financial institutions are doing transactions online. People are paying bills, moving money."

Andersen argues the 82% figure encompasses banks with varying degrees of functionality on their sites and that only a handful are solely informational. However, it's sticking to its guns that all online financial companies can do more to break out of old-world business models. "They're afraid to give up paper," Serif says, especially insurers and banks. "They know the process because they know the risk and the regulations involved with paper."

Although Jamieson agrees there's too much reliance on paper in financial services, it's not necessarily the institutions' fault, he contends. "Congress is working on ways to allow more electronic signatures, and this will free institutions to get rid of most of their paper processing."

Another impediment to effective Web delivery is rooted in the culture of financial services. For example, "Insurance companies have been brought up as mutual companies, organizations where the shareholders are the beneficiaries of the policies," Serif says. "Their need to respond fast is different from a public company" that's accountable to investors. Couple that with its reliance on agents and it becomes evident why the insurance sector rated last overall in the study.

Jim Ashbrook, a vice president with New York Life Insurance Co., New York, says the industry is well aware of its reputation as online laggards. With a few exceptions, insurers "haven't gotten there in terms of selling products and transacting" on the Internet, he says. "There are two groups in insurance: Those that use agents and those that don't. Those with agents have been reluctant to go online because it provides competition for its agents and excludes them from the process."

"This is a revenue stream insurers don't want to disrupt," Serif says. As with banks, there's just too much uncertainty factored into insurers' risk models when doing business online. "If you enter the Web with a culture that is very methodical while not knowing what to do, you get lost."

Yet, with brokerage heavyweights and other nonfinancial companies massing to roll out full-fledged e-banking services, banks can't afford to be timid. For instance, half of the brokers cited in the study are able to approve and fulfill sales online, compared with only 9% of banks.

D.R. Grimes, chief executive officer of Atlanta-based NetB nk, thinks it's "a trap" to compare the transaction volume of online banks with that of brokers. "Banks are more heavily regulated than brokers," he says. "So to a certain extent, that's probably why we're more comfortable with paper to verify signatures. I know I like people to send me money before they make an ATM withdrawal. There's a trade-off here because it's important to make sure the person is who he says he is."

Lawrence Baxter, executive vice president with the ebusiness division of Winston-Salem, NC-based Wachovia Bank, says one shouldn't be fooled by the perceived success of online brokers. "Even brokerages were a bit slow to get online mainly due to the high commissions of their agents. This is tricky because everyone sees the superb job E*Trade and Schwab are doing."

One thing that's clear is that the time is ripe for banks to snap up a burgeoning online marketplace. The projected surge in electronic billing, perhaps more than any other application, offers banks the chance to become consumers' bill aggregators of choice. But Serif is skeptical. "I don't think that will happen," he says. "There are too many other players that provide services in the financial industry and invest a lot of money in the Web."

"We are the bill pay aggregators of choice," Wachovia's Baxter counters. "It's true the Yahoo's want to do this, but surveys show consumers trust banks more than any other institution to handle their money."

To flourish online, Andersen notes, financial services companies, must morph into the proverbial one-stop-shop. The demise of the Glass-Steagall Act presents enormous business opportunities for all financial companies, but if Serif is right only one sector will reign victorious. "As it stands today, brokers have the greatest chance of being everything to everyone. If I can get all my financial services from Schwab, it's silly for me to continue to put money in a low-yield demand deposit account," he says.

Although NetB nk's Grimes thinks consumers will increasingly want one focal point for their finances, he stands by banks as the financial centers of choice on the Web. Like Baxter, Grimes says people simply trust banks more. However, Baxter adds, referring to one-stop-shops, "My biggest fear is brokers might pull this off. The big brokers are out there and they're impressive."

Focus on strengths

A potential problem associated with offering cross-industry products is that most people think the services they receive from an aggregator are top of the line. "Consumers approach (financial aggregation) under the assumption that all these services are competitive in their respective areas. But some prefer best-of-breed rather than all-in-one," Gomez's Jamieson says.

So perhaps there will still be room for niche players in the future. Hickman thinks each sector should first concentrate on their strengths before offering each other's products. According to Serif, these companies will "continue to flourish if they focus on how to add value to their existing products and services."

Insurer New York Life hopes to use its site as a one-stop-shop only for its products, Ashbrook says. As for selling auto insurance or becoming a bank, that's not in the cards for now. "It's just a matter of segmentation and marketplace," he says. "Some insurers do this, but it's not where New York Life wishes to go."

"It's impossible to be everything to everyone," Hickman comments. "The only way to do this is to forge relationships with other financial services providers from different industry sectors."

But Serif augurs a big shake-up within banking and insurance, and sees "a slow deterioration among banks and insurers because of their inability to act quickly. Brokers are more aggressive."

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