Strategy fundamentals will be crucial to capturing the potential of the Internet at the bottom line. Though there are new business models and many new players to understand in the dot-com game, effective segmentation based on understanding customers and channel economics will remain essential to success.

As of today, one customer segment accounting for 40% of the customer population - call it the price-sensitives or price-optimizers - commands some 70% of investments. Yet this group contributes nothing or worse to the bottom line at most financial institutions. By contrast, other segments get little attention or investment but provide gobs of profit. Unless a bank's Internet strategy comes to grips with these facts, it will fail.

Most traditional financial institutions that understand customer profitability realize they are not now well equipped to serve price-driven consumers on terms acceptable to the shareholder. Their legacy platforms and sales/service channels are simply too costly. The Internet offers potential cost relief, and this should be pursued vigorously. But remember that this presupposes that price-sensitive customers are motivated to severely limit their use of expensive channels and that back-office costs are reduced.

Currently in Internet banking, for example, the price-sensitives are being ardently wooed by Web-only banks offering high rates on deposits. The result: anemic net interest margins. And even if heroic cost-control efforts lead to a slim profit, it is doubtful whether this strategy will sustain the outsize valuations now enjoyed by the Internet banks. Bear in mind that the underlying revenue of one Web bank sporting a valuation of more than $1 billion amounts to that provided by just four healthy bank branches. Such banks are still not material players and may never be.

Conceivably, one way to serve price-sensitives at a profit is by supplementing banking revenue with that derived from advertising and referrals. My firm's analysis suggests a revenue potential from both sources equal to some 150% of the revenue amount now provided from the bank accounts of the least profitable 40% of customers. Nevertheless, this customer segment is unlikely to be a lucrative one for all but a few players that battle for significant national share. Therefore, although your Internet strategy team will find that it is easiest to conceive of features that will appeal to price-sensitives, top management should ensure that the majority of the planning and research focuses elsewhere.

A second segment, time- and convenience-driven consumers, is more desirable quarry. Accounting for about 25% of customers but some 40% of profits, this segment values its time much more highly than do the optimizers. These households are not indifferent to price, but they are not fixated by it. Given access to a set of integrated channels and a broad range of product choice, the time- and convenience-oriented are candidates for a one-stop cross-sale strategy.

However, we foresee a crowd of competitors taking aim at this segment. Many banks, a handful of full-service and discount brokers, several insurance companies, and a few monolines are vying to be financial services superstores. While modest investments in this direction will likely pay off by somewhat reducing attrition and encouraging consolidation of accounts, big wins will require significant technology, customer knowledge, and investments in brand building. There are also many pitfalls to avoid. Cross-selling to time- and convenience-driven customers must not deteriorate into exercises in bundling products at bargain prices. This will have unfortunate economic consequences.

The third segment looks to a bank for personalized guidance. For some of these folks, advice means research from Institutional Investor All-Star analysts; for others it is finding someone trustworthy they can turn to with basic questions. As in all five of our segments, there is therefore a range of needs.

The most demanding advice-seekers want an excellent brand, proprietary or leading-edge financial commentary, and tailored recommendations. In return they expect to compensate the institution handsomely. Since margins and the size of accounts in this segment are high, cost-to-serve is not a primary concern. In attempting to consolidate their hold on this segment, institutions also need to upgrade voice mail and e-mail channels. Based on actions to date, we expect to see leading-edge work by at least a few brokerage firms in this area.

Somewhat akin to the advice-seekers, yet still differentiable, are the recognition-hungry. These folks appreciate status and special treatment. Internet appeals may need to emphasize special rewards and exclusivity. High price is not necessarily a disadvantage; indeed, it often conveys distinction. In all likelihood, a stand-alone Internet play will not be sufficient to satisfy this group. Integration with other channels, as is the case with the advice-driven, will be required.

Our final category is the special situations - a segment that is comparatively small today. This is because only a few of the best monoline card providers are really very far along in mass customization, even though many others are trying. People in this segment are undergoing a life change - e.g., marriage, purchase of first home, divorce, childbirth. That is, they are experiencing events that predispose them to the purchase of certain financial products with definable features. The appeal to this segment depends on what looks like a happy accident of timing, but is in reality the result of a laborious world-class marketing effort that produces the right targeting at the right moment.

The best players more typically use direct-mail marketing for this segment, although inbound call transfers are increasingly powerful. Notwithstanding the capabilities of firms like Doubleclick, tapping the right person at the right time with the right offer is still a challenging task using just the Internet. Banks need to leverage their own data bases of customer attributes and behavior, or obtain opt-in profiles from consumers.

To summarize, the Internet does present opportunity for increasing shareholder value. We believe a few winning strategies are emerging. However, there is a regrettable bias toward gearing Internet investments toward the price-sensitives.

The focus of strategy for major financial institutions should revolve around differential investments needed to attract better pickings. These pickings are to be found among the customer groupings that demand nonprice - and therefore noncommoditized - benefits. Moreover, there is a need when designing strategies for these segments to capitalize on one's uniqueness and strength. For example, large banks have all the channels, have scale in existing relationships, and the ability to use internal data bases in conjunction with external ones for segmentation and targeting.

"Somehow-it-will-all-work-out" strategies often don't work out. Next-generation Internet investments will need to enrich the experience of the top 20% or 30% of customers who provide more than 100% of profits, while radically lowering the cost of serving revenue-minimizers. This won't happen just by following today's momentum path. Mr. McCormick is president of First Manhattan Consulting Group, New York.

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