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E-business
Watch
Tracking the
online media to bring you the key e-business trends
October
16, 2000
The
Future of Online Banking
The Internet has
turned out to be an extraordinarily efficient and effective channel for the
delivery of financial services. Ironically, though, the simplification and
standardization of financial products for online delivery has also reduced
switching costs and intensified competition.
To avoid creeping
commoditization and retain customers in this hyper-competitive environment,
banks and other financial institutions are being forced to offer a more
innovative and complete range of products and services to their increasingly
Internet-savvy customers. This in turn is leading to a dramatic blurring of the
line between online banking and other online financial services. The banks,
with their huge customer base have both the most to lose and gain from these
changes.
Customer Demands
The evolving
nature of customer demands is driving innovations and new competition in the
financial services sector.
Ease of use
and support –
Customers want intuitive interfaces that allow them to easily navigate
financial sites. And whenever they have difficulty, they want immediate
assistance. To address this, companies like Suretrade have incorporated instant
messaging technology into their customer support systems. Leaders like
Fidelity have gone one step further and are either building in house or
purchasing solutions from companies like eGain
and CosmoCom that allow customer service
representatives to remotely
access a customer’s browser and guide them to particular areas of the
sites. This is especially useful for Web sites that have a large number of
pages, like Fidelity’s, whose site has 30,000 pages.
Convenience – Customers increasingly want to do their
banking anywhere and anytime. To address these needs, companies like 724 Solutions and Aether Systems have developed
technologies that allow banks and brokerages to offer wireless
banking. At the same time,
Person-to-person (P2P) payment systems are adding the convenience of direct
transactions between customers.
Customization – Online customers are becoming more
demanding, and increasingly want to be treated as a “market of one” with
customized profiles and personalized services. They also want a greater
role in the design of their financial products and services. FOLIOfn, for instance, takes customization
to another level by allowing customers to build their own personal portfolio
(or FOLIOs) of up to 50 stocks. Customers are able to make unlimited trades
into and out of their FOLIOs, which are treated as a single fund, for a flat
monthly fee.
Control – Customers are demanding a consolidated view
of their financial lives, even when the products are from multiple sources and
different companies. This provides greater convenience, while helping customers
make better financial decisions. The next development, “open
finance”, will give customers transactional capabilities through one site.
Financial institutions like Citigroup, with its myCiti.com site, and Morgan
Stanley Dean Witter have already started using the services and technology of
leaders like Yodlee and CashEdge.
Decision
support and transparency – Customers want tools that help them to make better financial decisions
and do comparison shopping. At the same time, they want greater transparency in
how their products or services are constructed. While transparency is generally
anathema to financial services companies, there is a new crop of startups that
are opening their kimonos. MetaMarkets,
for example, makes the composition of its funds visible in real-time, and
invites unit holders to talk directly with fund managers. And MutualMinds creates mutual funds whose
stocks are based upon the picks of investors using a rating system that
attributes more weight to investors with the best records.
The Challenges
Spurred by
industry deregulation and heightened competition, banks need to deliver more
than just the basic package of chequing, savings, and money market accounts if
they wish to survive. They also will need to provide – either from in-house
capability or through third party arrangements – everything from insurance and
mortgages to risk management instruments.
Banks have to be
cautious not to lose the most attractive and high margin component of their
business to “left-field entrants” and startups. The person-to-person payment
market, for example, is threatening to grab a huge slice of the banks’ $18
billion in annual revenues derived from payment transactions. Furthermore, with
the repeal of the Glass-Steagall Act in the U.S., other financial institutions
such as insurance companies and brokerages are targeting the high net worth
clients of the banks.
Particularly
threatening are new financial service providers that are leveraging their
existing relationships with customers to offer high margin financial services.
These left-field entrants are as numerous as they are varied, coming in the
form of supermarkets (Loblaw’s PC
Financials), wireless carriers (NTT’s DoCoMo) and portals (Yahoo’s FinanceVision). Most of
these non-banks have applied for banking licenses and are purchasing
“bank-in-a-box” solutions which they brand. These companies use banking not
only to make a profit but also as a way of acquiring and retaining customers to
their core business. Consequently, they can price their services more
aggressively than the banks, thus threatening to steal market share.
This rapid pace
of change is a major challenge for the banks, which have been hampered by
legacy systems constraints, as well as their own cultural inertia. But, in spite of dire predictions regarding
their demise, banks can remain dominant players in the financial services
industry by leveraging their unique and powerful assets. Banks have, for
example, their trusted brands and solid, reliable image. More importantly, in
building an online business, a bank’s offline customer base is a huge asset for
it will be harder for competitors to pick off the banks’ current customers than
for the banks to get them online. Moreover, even when financial services
innovations are created by nimble startups, the banks will have the financial
clout to incorporate the innovations or even acquire the startups.
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