Will the Banks Contral On-Line Banking?

The indifferent performance of virtual banks in converting the public to on-line banking would seem to hand the advantage to their traditional competitors. Yet most incumbents have been slow to meet the on-line needs of their customers. When people write a check or take cash out of an automatic-teller machine, few of them stop to think whether the computer system handling their transaction might crash and their savings disappear. But when customers of Internet banks sit at their PCs and move thousands of dollars between accounts, they must wonder, if only for a moment, if such a catastrophe could occur. So far, only the rare individual entrusts all of his or her financial affairs to a virtual bank (Exhibit 1, on the next spread). Given these reservations, it would seem that the solid, reliable image enjoyed by established banks should give them a special opportunity to lead in the online world. Have they taken it? In one sense, they have. In other industries, incumbents roused themselves to exploit their natural advantages only after pure-play attackers brought enormous numbers of customers on-line. In banking, the opposite is true: while Telebank and NetBank are having trouble notching up their first 100,000 customers, Citibank, Wells Fargo, and Bank of America can boast hundreds of thousands, if not millions, of on-line accounts (Exhibit 2). Indeed, so indifferent has been the performance of Internet-based institutions that CompuBank, the first purely virtual bank to receive a charter, recently announced plans to scale back business-to-consumer (B2C) activities in favor of business-to-business (B2B) alternatives. What is CompuBank walking away from? Quite a lot. On-line banking will grow to embrace more than 25 million households by 2003, and the first six to ten million of those households will typically have annual incomes of around $65,000--an attractive population (Exhibit 3). Attractive demographics mean attractive economics; the bottom-line benefits of moving an Internet-savvy traditional banking customer on-line include improved retention, higher balances, and broader relationships. Unfortunately, most incumbents risk this potential by failing to meet the customers' on-line needs adequately. The majority of the banks that provide the most satisfactory on-line experience for customers (as measured by standards such as ease of use, access to help, and security) are attackers; they also offer better pricing and greater choice. Incumbents, meanwhile, often fail to meet such basic consumer requirements as news and information, tools to manage finances, and even uninterrupted access to the incumbents' World Wide Web sites. Some established banks, it should be said, do have promising efforts under way. Bank One, Huntington, Wells Fargo, and others have all appeared in the top ten list of the G[acute{o}]mez Advisors' Internet Banker Scorecard, a respected independent index of on-line banking services. Citibank has aggressively built alliances and partnerships with leading electronic-commerce operators. But too many players have done much less. Given the diminished threat from virtual banks, how much does the slowness of the established banks' response matter? Actually, a lot--because incumbents face other, more powerful threats. To fend off the attackers, most banks will have to mobilize a more formidable set of on-line services than they have put forward so far. The real threat A majority of the leading on-line brokers are beginning to offer banking products and services as part of their overall offers. They are actively seeking to capture "excess" balances in existing checking and savings accounts by offering better rates. And they generally claim high levels of customer satisfaction--almost 50 percent higher than the established banks' on-line services can--and a lower churn rate (Exhibit 4). According to McKinsey's recent on-line financial services survey, almost 75 percent of on-line banking customers said that they would be at least "somewhat likely" to transfer funds into brokerage accounts that offered check writing, bill payment, and money market rates on excess cash. …