[LINK] The hollow promise of Internet banking

[Bernard Robertson-Dunn]

<brd>
Interesting how things turn out differently from the way they were
expected to. See last para.
</brd>

The hollow promise of Internet banking
Nov 9th 2000
http://www.economist.com/finance/displayStory.cfm?Story_ID=418297&CFID=162174&CFTOKEN=75423812

Internet banking has failed to live up to its promise, both for traditional
banks and for the upstarts that were supposed to wipe them out

UNTIL six months ago, no self-respecting financial consultant would travel
without it: the bar chart showing that the marginal cost of Internet
banking transactions was a tiny fraction of the cost of branch banking. It
was the chart that launched dozens of stand-alone Internet banks.
Unshackled from the cost of real property-and real people-Internet banks
would, it was claimed, blow stuck-in-the-mud incumbents out of the water.
However, as Roberta Arena, director in charge of the Internet for HSBC, a
British banking giant, remarks wryly: "Easy to say; tough to do."

Now Internet banks around the world are faltering. Part of the reason is
that their physical rivals have become wiser, launching their own
integrated "clicks 'n bricks" strategies that offer customers electronic
access as well as dark satanic branches. But they are not undisputed
winners either. They are finding that the Internet is, at best, a zero-sum
game.

The decline of the stand-alone Internet bank has been a global phenomenon.
In America, Wingspan, one of the e-pioneers, announced in October that next
year it will share information-technology facilities with its parent, Bank
One, in order to save money. First-e, a Dublin-based Internet-only bank
valued at euro1.1 billion ($1.1 billion) when it was acquired by Spain's
BBVA in March, has laid off staff and cut expensive television advertising.
Marbles, an Internet credit card offered by Britain's HFC Bank, is also
switching from TV advertising to cheaper direct mail; and SEB, a Swedish
bank which has said that it sees the Internet as a means of expanding
overseas, nonetheless acquired BfG in Germany because of its 170 physical
branches.

Egg, which was established two years ago by Prudential, Britain's largest
life insurer, has seen its value subside since it was launched on the
stockmarket this spring; and Halifax's stand-alone Internet bank, IF (for
"Intelligent Finance"), opened eleven weeks later than planned, and then
only as a telephone bank. AIB, Ireland's biggest bank, dropped its own
plans for a stand-alone Internet bank at the end of October after
concluding that its customers preferred to have a choice of channels. In
Japan, never known for being at the forefront of financial innovation,
Sanwa Bank is abandoning plans to set up a ¥15 billion ($140m) stand-alone
Internet bank, having seen their poor performance elsewhere-which leaves
Japan with just one online option: Japan Net Bank.

Customer inconvenience

Why has the online "revolution" faded so fast? The biggest problem has been
that, for all their talk of liberating customers from the yoke of
traditional branches, Internet banks did not think clearly about what
customers really wanted. For a start, they like to know that their money is
secure. And whether it is fair or not, customers fret about the security of
online transactions. Just as worrying is the thought that somebody else can
find out your bank-account details, even if they cannot do anything with
them. Traditional banks are still thought to be more secure, even though,
as Barclays showed this summer, they too can bungle software upgrades and
give one customer's details to another.

Convenience was supposed to be the big attraction of Internet banking. But
service has proved unreliable. Servers crash and connections can be slow,
especially over home telephone lines. Often it is easier, and quicker, to
telephone. Internet-only banks have also been slow to offer a full product
range. The convenience of online banking is greatly diminished if a
customer has to maintain a current account, for example, offline. And
Internet banks have discovered that customers have a stubbornly persistent
preference for buying long-term savings products face-to-face. Egg is now
considering a link with a high-street firm for this very reason.

Customer resistance to Internet-only banking has slowed revenue growth.
This is of crucial importance to e-banks that were relying on that
consultant's chart. Marginal costs for Internet transactions may be
negligible, but fixed costs are anything but. Halifax put aside £100m
($145m) for IF and its 1,100 staff.

Many Internet-only banks based their business plans on the assumption of
rapid customer recruitment. But new Internet-only banks start with no
customers at all. In order to get them, they had to spend real money-in
Marbles's case, for example, some £25m to date-to build consumer awareness.
Then, to retain them, they have had to offer appealing (and unsustainably
unprofitable) returns. Eventually, everybody in the market was doing the
same.

ABN Amro, a Dutch multinational bank, reckons that British online banks
have plans to attract 3.5m customers by the end of 2002. But Forrester, an
Internet research organisation, reckons the total market is just 2m. Most
of the targeted customers already bank elsewhere. The bricks 'n mortar
banks may have been slow on the uptake, but most now allow customers to do
all their banking online. And they have been forced to respond-if
grudgingly-to the "online only" banks' pricing. The result is that online
banking is actually still growing, but mostly among traditional banks.

So far, however, none has found that the Internet has delivered what it
first promised: lower costs. Cap Ernst & Young, a firm of consultants,
reckons that the Internet cut British banks' costs by just 0.1% last year
when they were, somewhat heroically, hoping for a 25% cut. Worse still, on
the revenue side they have found, says HSBC's Ms Arena, that the Internet
is the consumer's friend. HSBC itself was forced to cut its British
mortgage rates to 6.75%, and promised that it would never exceed base rates
by more than one percentage point, in response to a price war in home
loans.

The Internet may not have brought about the wholesale cannibalisation of
traditional banks' business, but it is still not good news for them. Jose
Fonellosa of Spain's BBVA, which acquired first-e, says that the Internet
is at best a zero-sum game for banks. He defends his massive investment as
a defensive move, saying: "If I'm not there, someone else will be."

Big banks are now wrestling with how best to use the Internet, and some of
their plans look distinctly off-centre. Lloyds TSB, a British bank whose
share price has been hammered because investors thought it had not "got"
the Internet, has now gone to the other extreme. It has a "portal" leading
to other people's websites, and hopes to earn commissions when, for
example, its customers use it to lease new cars.

Bankinter, a Spanish bank, developed data-mining techniques to such an
extent that it has been able to set up a useful business as a private
detective agency for suspicious spouses. It is a long way from the original
dream of click 'n borrow, but then the Internet was never going to change
business in predictable ways.

-- 
But then somebody told me, the best things in life aren't things.
-- Social Distortion

Regards
brd

Bernard Robertson-Dunn
Canberra Australia
brd@dynamite.com.au