Not working up to its potential. If online banking were to receive a report card, that's what it might say.

Leaders in Internet banking offer a wide range of services, full integration of the Internet with other delivery channels, intensive marketing of their Internet service and strong customer service support. But a gap looms between the leaders and what smaller banks can offer. Internet banking, often considered a way for community banks to draw even with their big city competition, could actually widen the gap between them.

The issue is just beginning to surface because Internet banking is growing more slowly than anticipated, and the key ingredients in successful Internet banking appear to be ease of use and service, not just technology.

While the cost of Internet banking technology is low enough to let nearly any size bank offer Web transactions, there will be a large difference in quality between small and large banks, says Paul Jamieson, senior analyst for banking and payment services at Gomez Advisors Inc., an Internet research firm based in Lincoln, MA.

The issue has been somewhat hidden by the stop-and-go nature of early Internet-banking adoption rates.

A report from Cyber Dialogue, a New York-based Internet customer relationship management company, last year attracted widespread attention by saying that high churn rates among Internet banking customers had resulted in a nearly stagnant total number of online banking users. But those numbers reflect experience of nearly two years ago, cautions Sam Callard, senior analyst in the financial practice division of Cyber Dialogue. The question Cyber Dialogue asked in its 1999 survey was whether an individual had ever discontinued using online banking.

Collard thinks the picture has improved and the numbers of users who discontinued was largely a reflection of conditions, in both Internet experience and online banking facilities, during 1998-99.

"Several factors were at play," says Callard. "Sticky applications such as online bill presentment and bill pay hadn't emerged, customer service was lagging, and the majority of regular commercial banks were not aggressively migrating their customers on line." Now the big banks are marketing more, customer service has improved and Web sites are better designed, he adds.

Gomez Advisors has also concluded that online banking is growing and now is used by nearly 17% of the online adult population. "But out of that group, 2.15% had signed up but never used it, and 1.89% had signed up, used it, and then stopped," says Chris Musto, director of financial services at Gomez.

Further research indicates that the non-users and drop-offs are people who don't make much use of the Internet for other transactions either, whether buying books from or trading stocks.

The advisory firm expects Internet usage to continue growing because banks are getting a lot better at it. They have better capabilities, and they have a better idea of how to integrate the Internet with their overall strategy. "There's a big difference between offering the functionality and having an effective Internet offering," says Musto. "To be effective, the bank needs to integrate the Internet with its marketing, delivery and customer service. We often see community banks in particular fail to do this."

The leading banks, however, have expanded their Internet channel by fully integrating it with the back office.

"You get the same information from every delivery channel, so you could go to a branch in Cleveland today and then fly to Seattle tonight and you would see the same information," says Pat Swanick, president and CEO of Key Electronic Services, a unit of Cleveland-based KeyCorp. "With customers being more mobile and more sophisticated about their finances, they expect an integrated approach so they don't get a different balance from a phone query than they receive at the ATM. They expect the bank to have it all together."

Gomez Advisors' Jamieson adds another advantage that big banks enjoy: They have the internal resources to create customized Web sites with a wide range of services from credit cards to investments, all managed from the same screen. Banks have learned that customers are more likely to make use of an Internet banking service if they can accomplish all, or at least most, of their banking tasks on it.

"It's really critical to provide consumers with the ability to manage their finances on-line," says Jim Smith, vice president of Internet strategy and products at Wells Fargo & Co., which is widely cited as a leader in Web banking.

Wells Fargo has long offered familiar banking services such as the ability to check balances, transfer funds and pay bills. But more recently, the bank has added incremental services that customers need, such as the ability to change their address, request a copy of their statement or order traveler checks and foreign currency for next-day delivery. The bank is continually adding functionality, from online brokerage to mortgages. Online student loans will come later in the year, and bill presentment and limited wireless access sometime down the road.

KeyCorp has taken a similar strategy. "We allow our customers to do everything they do in the branch, except get cash," said Swanick.

Key has come a long way from its first site, which was standard "brochureware," he adds. Now its offering is much more substantial. The site recently began to allow investment transactions through KeyCorp's McDonald Investments subsidiary and soon will provide some insurance products. The bank offers online bill payment and is working with Transpoint on electronic bill presentment as well.

"You need to give clients a reason to return to the site," said Swanick.

Focus groups and customers surveys have said that convenience and saving time are the main reasons that consumers use Internet banking. But customers may need some convincing. Banks have to make sure their customers know what they can do on their Web sites by training tellers and customer service reps in the value of Internet banking, not just by announcing the service through signs in its branches and in mailings to customers. Once customers sign on for Internet service, the smart bank treats them with respect and refrains from using the new access to send them annoying junk mail.

At Wells Fargo, for example, integrated marketing means full awareness of what offers have been directed to an individual customer through all channels. "We have a one-to-one marketing engine so we are only presenting offers that are relevant to an individual customer. We will not sell you a credit card if you already have one with us," Smith says. "The most critical thing for any bank to do is think from the customer perspective, not the bank perspective. We have found that when we organize information around the way the customer thinks, our cross-sell rates go up and customer satisfaction goes up. Effective Internet banking is really all about the way the customer thinks."

Finally, the Internet should offer extensive customer services. It should support common needs such as ordering checks and less common requirements, such as obtaining an old statement or an image of a check. For instance, Internet pioneer Security First Network Bank, now owned by Royal Bank of Canada, can show customers both the front and the back of a cancelled check on line.

And with Internet banking, customers expect the bank can provide support not just in finance, but in technology. Gomez Advisors suggests that banks make sure their sites offer help either through e-mail or a prominently displayed phone number. "We talk in terms of customer lifelines," explains Jamieson. "As the customer experiences the Web site, he should have access to lifelines such as a button that allows the customer to send e-mail or a phone number."

To support its site, KeyCorp has a customer service call center just for Internet banking. It receives 800 to 900 calls a day on topics from finance to problems with browsers to questions about transferring information from the Web site into Quicken.

Providing that kind of comprehensive financial and technical support is a big hurdle for a community bank. Not surprisingly, core banking system companies and service bureau providers are looking at this as an opportunity. Many of them--including Fiserv Inc., Open Solutions Inc. and M&I Data Services and Phoenix International Inc.--sell private-label Internet banking services that institutions can offer customers under their own brand names.

Still, challenges remain. "The question of whether community banks can get going on the Internet is different from the issue of whether they will be effective at it," says Musto at Gomez Advisors. "Internet banking won't help if you don't integrate it with your marketing, delivery and overall customer service."

Big banks might have the technology, but they have not proven themselves adept at delivering quality service, says Cary Serif, lead partner for e-business financial services, North America. Smaller banks should be able to compete against them, he adds.

"I can't think of any reason a small bank can't operate as effectively as a large bank in customer service. The smaller bank's costs will be slightly higher because of its lack of scale, but whether it is Internet banking, PC banking, or call centers, generally speaking the level of service at major banks is quite bad."

Smaller banks now usually charge lower fees than the large banks, so if they can match their larger competitors' prices for Internet banking, or even charge slightly more while providing better service, they shouldn't have trouble competing, he says.

Plenty of software exists to automate customer service, adds Kathleen Shear, North America financial service e-business knowledge manager at Arthur Andersen, mentioning Broadvision and Brightware as examples. From automated e-mail responses to dynamic financial planning software, small banks have lots of ways to provide high quality Internet services without spending millions to build their own applications, she says.

However, many banks have trouble fully integrating their Internet banking platform with the rest of their operations. Often, says Gomez's Jamieson, banks tack an Internet site onto technology systems that are dedicated to separate business line, leading to a disjointed experience for a customer who navigates from a demand deposit account to credit cards to a mortgage. When the mortgage Web page looks entirely different from a checking account Web page, the customer gets confused.

The expense of creating a uniform look and integrating systems is part of the reason that banks can't expect to save money from opening an Internet channel, Musto says. The other reason is that Internet users are customers who have already been using telephone banking or ATMs. He encourages banks to think of Internet banking more as a way to strengthen their customer relationships than as a way to cut costs.

"Banks are viewing it less as a cost savings and more strategically," he adds. "The Internet is a hook in the customer that allows the bank to maintain a tighter relationship. In addition, banks think they will be able to collect a lot of valuable data about customer habits and interest if they can track what a customer does on their Web site."

That's been the case for Wells Fargo. "When we first looked at PC banking we thought that customers would change their transaction behavior and move to the Internet," says Smith. "And what we found is that was not true. Customers love the convenience but they don't change their behavior that dramatically.

"The thing we didn't anticipate was how much Internet banking strengthened our relationship to our customers," he continues. "If we look at customers with the same demographics and the same length of relationship with Wells Fargo, and compare those to a similar group who have not signed up, then look at attrition and balance growth, we find the customers who have signed up for Internet banking are half as likely to leave, have much higher balances, and hold more products with us."

That said, KeyCorp's experience suggests that above a certain level of penetration, Internet banking can begin to reduce customers' use of other channels. About 13% of Key's DDA customers, or 200,000 people, use its online banking, Swanick reports. That's double the industry's average participation, and it shows in other areas at the bank.

"Generally new channels have added transactions on inquiries," he says. "Now, for the first time, we are seeing the volume to our call centers is actually beginning to decline. Customers are not calling as frequently; they are using the Internet instead for simple inquiries such as account information and balances." Key's Web site also allows customers to stop payment on checks, a process that is time-consuming on the phone.

In two years, predicts Gomez Advisors, Internet banking will grow sharply in total number of users, more consumers will access their accounts over wireless devices, regulatory paperwork requirements for opening new accounts will be reduced, and financial services convergence will increase.

Where will this leave bankers? In a strong position, at least with their richer clients. "People who have the greatest demand and the greatest access to services are wealthier people who have come to expect accountability and responsiveness," says Jamieson. "Aggregators, who merely assemble products from a number of providers, won't offer the reliability that demanding clients expect. There will be room for providers who can provide accountability up and down the value chain and across products--for financial institutions that can create a solid relationship with customers."

KeyCorp's Swanick is more down-to-earth about the opportunities. "In many cases, customers are looking at their financial lives as a chore," he says. "If we can shorten the time it takes and give customers the confidence that they have done a great job in half the time, and that they have a trusted advisor like Key looking after that them, that is a big driver."

Tom Groenfeldt is a freelance writer who specializes in financial technology.

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