Banking & the Internet: Searching for Profit in a Zero Sum Game

A penny per transaction. Years after the Internet Revolution clicked open, that number is still staring bank managers in the face and sometimes causing them to do downright silly things. A penny per transaction is one-hundredth the cost of the average, face-to-face branch transaction. That's a big payoff in profits --at least potentially. So since the mid-1990s, the question has been how much are bankers willing to invest -- and how long are they willing to wait--to reap that kind of cost savings (read profits). The answer, so far, is billions with billions more in capital budgets earmarked for Internet-related projects in the next few years. But what are bankers getting for this investment? What should they expect? What's realistic? Can anyone really win this game that seems to have far more shells than prizes? You Gotta Have a Website In the beginning, having a website was the passport to Internet Nirvana. If you wanted to play in the Internet space, you needed an address. That was easily done, but also easy to mess up. What kind of website, how configured, featuring what service and products, how integrated, how tied into existing compliance needs? The passport analogy is better than you think. You need a passport to go to a new country, but you also need a destination, specific tickets, flight plan, luggage, immunizations and so on. The passport is essential, but only a beginning. Most banks in the Internet space are still like armchair travelers. They have a passport and a certain notion about where they are going, but not a detailed itinerary. The vast majority of banking we sites are still simply advertising. And still not every bank has a website, flashy or not. According to the Office of Comptroller of the Currency's (OCC) 2000 Questionnaire, only about 62 percent of all banks have websites. Predictably, banks under $100 million in assets are less likely to have websites (46 percent) than banks with more than $1 billion in assets (95 percent). However you cut it, there are some 5,000 bank websites flickering off and on in cyberspace. But what do these websites offer? Of these 5,000, nearly 3,000 are simply placing a marketing flag on the Internet. Customers cannot transact business on these sites, but they might be able to get current rates and locate branches and ATMs. About 2,000 sites are transactional, according to a recent study by the Federal Reserve Bank of Chicago. Of these sites, the most popular transactions offered are balance Inquiries, fund transfers and bill payment. According to the OCC survey, fewer than 500 banks nationwide allow customers to open checking accounts or deposit accounts via their website; fewer than 300 offer any kind of lending product through their website. Again, the big players -- Wells Fargo, Bank of America, Citibank--have these kinds of services available so you can't argue that consumers are deprived of these options. But they are limited to just a handful of choices. At this point, it is easy to see how poorly reality is measuring up to potential when it comes to Internet banking. It's good that customers can check balances and transfer funds online (or via the phone) This is convenient for them and cost efficient for the bank. But is it really banking? Websters defines a bank as "an establishment for the custody, loan, exchange or issue of money, for the extension of credit, and for facilitating the transmission of funds. " Clearly, that encompasses a lot more than checking balances, which never was exactly a profit center for a bank anyway. Doing it Right The question arises, then, why have banks been so slow to move account opening and loans to the Internet? That is how banks make money, isn't it? Much of the hesitancy has been the concern about doing it right. Compliance is a major issue. How does a banker make sure that all the regulations are met in this new dynamic channel? …