The Economics of Online Banking (1,040 words)
By Tom Ebling
In the six years or so since the Internet went mainstream, it has rocked even the most staid financial institutions right down to their marble floors. Prior to the Web, competition in the financial services arena was largely regional, with consumers having only limited options from which to shop for auto loans, checking accounts and mortgages.
But all that changed with the Web. Now dozens of personal-finance sites—and nearly every major Web portal—are delivering up-to-the minute rate comparisons to home computers all across the globe, all with online loan applications a quick click away. By placing product rates side-by-side for the whole world to see, the Internet has laid bare the fundamental economic underpinnings of banks and credit unions everywhere, to the point where competition for customers has become purely a numbers game.
Oddly enough, financial services institutions are looking to the Internet to help alleviate the very pressures caused by the Internet. How so? Again, it breaks down to numbers. To service an in-branch transaction, it may cost a financial institution as much as $2.50, including overhead and operational costs. To service that same transaction via an ATM or call center costs considerably less, somewhere around 50 cents. But that's nothing compared to the Web. To service this same hypothetical transaction via home computer might cost a mere nickel.
The power of this cost savings is monumental because with every customer that adopts the Internet as the service channel of choice, the bank gains economic advantage. The more customers migrate to the Internet, the easier it becomes for the bank to offer competitive rates. The better the rates become, the more customers a bank can attract. The more customers the bank attracts, the better the rates become, and so on. It's the kind of competitive snowballing that marketers love or hate, depending on which way the ball's rolling.
Knowing the Pros and Cons
Clearly the Internet offers dramatic cost savings, but it does come with risks, particularly for small independent banks and credit unions. While the Web may help slash operational costs, it threatens to do so by eroding the very foundation on which small financial institutions have been built: personal interaction and service. The repeat in-branch visits may be expensive, but through personal interaction, in-branch personnel know what the customer is buying, what the customer is saving for and what the customer has planned for retirement. In turn, branch employees can offer the right financial products, at the right time, to customers.
For as long as banks have existed, individual institutions have risen or fallen based on their ability to recognize, anticipate and service these individual needs. There's no reason to think that the Web would make it otherwise.
Financial institutions looking to migrate customers to the Internet—and still keep them as customers—cannot fail to maintain this intimacy with every customer. And doing that via the Web depends on two distinct IT capabilities: first, the ability to collect and reconcile customer data captured from all corners of the company—branch, ATM, call centers and Web—and second, the ability to analyze the data to the point where they reveal individual preferences and propensity toward different financial products.
To date, most banks have demonstrated an ability to gather and reconcile customer data from a variety of touchpoints and deliver that information to the Web. For instance, ATM transactions usually appear in online summaries of activity long before the customer is in a position to check his or her account on the Web. By and large however, this type of summation and reporting is the extent to which customer data is used on the Web. Interestingly, the reconciled customer data—-the profiles that contain data from all corners of the business—typically contain little information on customer activity on the Web site, such as pages accessed, duration of the visits or frequency of the visits. This begs the question: How can a bank successfully migrate individuals to the Web without understanding how those individuals use the site?
Using Data for Web Offers
Site usage is an untapped goldmine for banks. With the innate trust that exists between customers and their financial institutions, banks have nearly limitless access to customer data. Demographic information, personal income, investment portfolios, records of individual transactions—nothing is held back from the bank. The opportunity for banks then is to analyze this financial and demographic data in light of recent activity on the Web and deliver appropriate offers based on the results of this analysis. It's personalization in the small-town sense, only this time it's being delivered to the global village.
A hypothetical, but perfectly plausible example, will bring the value of this type of analysis to light. Say , a customer changes her individual checking account to a joint account. Two months later, her automated payroll deposits jump 20 percent. Three months after that, she spends a few hours browsing through the bank's Web site for information on mortgage rates.
Intelligent analysis of her data would suggest that she has just gotten married, landed a nice raise and is right now in the market for a home. A prudent bank would push mortgage content to the front of her Web visits, and might sign her to a mortgage before any other institution knows she's in the market.
While this example may be a tad pat, it does cut right to the center of what is needed to drive intelligent, personalized content via the Web: reconciliation of customer data from all points, including the Web, to form a complete perspective of the customer, and prompt, deep analysis of the complete profile. With these two capabilities working hand-in-hand to deliver targeted and appropriate Web content to individuals, financial institutions can capture the cost savings of doing business via the Internet and still maintain the intimate service customers have come to expect. It's a one-two heave-ho that starts the competitive snowball rolling the right way.
Tom Ebling is CEO of Torrent Systems, a Cambridge, MA-based software company that provides enterprise class analytic CRM applications. He recently wrote a white paper on how to leverage Web data as part of a total analytic CRM infrastructure. The white paper is available from www.torrent.com